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Should U.S. have a loonie? (Worth a bit less, of course)

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Should U.S. have a loonie? Whatever would we do without something we can call the greenback?

A new report by the U.S. Government Accountability Office recommends replacing the U.S. dollar bill with a coin similar to Canada's loonie . Friday's report, the latest of several, points out the billions of dollars the U.S. would save, although Americans aren't all that keen on the idea.

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The suggestion is that Congress do it anyway, as Canada did despite public opposition. Americans would soon get over it, the GAO says.

"In Canada and the U.K., the public also preferred low-denomination notes to coins, but the governments nevertheless switched from notes to coins to achieve financial benefits," the report says. "While the public initially resisted these transitions, opposition dissipated over time with no alternative to the note."

This marks the fourth or fifth time in about 20 years that the GAO has reported on the issue, finding each time that the government would save money. (No doubt that, by this point, those savings would be eroded by the costs of the never-ending studies.)

The GAO found that, because coins are more durable that paper and don't need to be replaced as often, the government could save about $5.5-billion over 30 years. But to make it work, the government would have to stop producing notes to leave no alternative.

There are actually five different $1 coins in the U.S. now, including the Eisenhower coin, the Susan B. Anthony coin, and the Sacagawea coin, along with the Presidential and Native American coin series. Because of "limited public demand," the Federal Reserve has more than 1 billion $1 coins sitting in storage.

Some interesting tidbits from the findings:

"The federal government experiences a financial gain when it issues notes or coins because both forms of currency usually cost less to produce than their face values."

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  • Canada estimated the conversion to the loonie in 1987 would save $175-million over 20 years, but later found it saved $450-million between 1987 and 1991 alone.
  • "Among the rationales for replacing notes for coins cited by foreign government officials and experts are the cost savings to governments derived from lower production costs and the decline over time of the purchasing power of currency due to inflation." The U.S. dollar, for example, now has the buying power of a quarter in 1975.
  • "It is common for people to take coins out of their pockets and store them at the end of each day rather than retain them in their wallets as they do notes, for use the next day. These factors cause coins to circulate with less frequency than notes."
  • "Senior officials at the Federal Reserve and Mint told us the increased circulation of $1 coins could increase the risk of counterfeiting, and senior Secret Service officials told us that counterfeiting of coins is an ongoing problem in the U.K. ... In Canada, however, counterfeiting is minimal."

Traders take dim view of greenback Currency traders and hedge funds are taking a dimmer view of the U.S. dollar .

They're selling short the greenback in increasing numbers, the Financial Times reports today, citing data from the Chicago Mercantile Exchange Exchange. This comes as the U.S. dollar continues to lose its appeal and as markets bet on an interest rate hike by the European Central Bank, flagged last week by ECB chief Jean-Claude Trichet.

"Friday's weekly data from the [Commodity Futures Trading Commission] highlighted that market participants now hold a record net short [U.S. dollar]position of $29-billion and that they hold every currency long against the [U.S. dollar]" added Scotia Capital currency strategist Camilla Sutton, noting that the largest long positions include the euro, and the Australian and Canadian dollars.

"These are extreme positions and leaves the market not only one sided, but also vulnerable to any rapid shift in sentiment," Ms. Sutton said. "However, with most of the currencies still reaching new highs, it is likely too early to position for a period of retracement. Watching the CFTC data in the coming weeks will provide important clues as to shifting sentiment and could be an early warning signal that the current [U.S. dollar]weakness trend is moving towards a temporary retracement."

Commodities climb Commodities climbed today, notably oil , amid continuing turmoil in Libya.

Crude, gold , silver and cotton all chalked up gains as violence in Libya escalates.

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"Although we are seeing plenty of volatility day to day, it is very difficult to make the case for further significant gains in shares whilst there is still so much uncertainty surrounding Libya and the oil price," said IG Index sales trader Will Hedden.

"This is a pattern across all the major indices at the moment, and it would be very surprising if they were able to break through their February highs until there is some sort of resolution."

Added senior economist Jennifer Lee of BMO Nesbitt Burns: "With headlines of a possible civil war breaking out in Libya, it is a wonder that overseas trading isn't worse this Monday morning. Still, oil prices are up nearly 2 per cent to 2½-year highs (WTI is at $106 while Brent nearly hit $118), and gold is up $10 to a record $1,440. U.S. equity futures are slightly positive, ditto for European bourses while Asian equities had a mixed session at the start of the week."

There's a reason they call it junk Moody's Investor Service took a knife to Greece's credit rating again today, slashing it by three notches. Some economists already believe Greece will have to default or restructure, and the Moody's decision Monday just adds more fuel to that fire.

Greece fired back, as it has done since it sparked Europe's debt crisis, its finance ministry saying that the rating cut was unjustified and warning that such moves "can initiate damaging self-fulfilling prophecies."

"While Moody's did recognize that Greece is making an effort to bring its balance sheet on a better footing, it cited three reasons for the downward revision: 1) challenges with revenue collection, 2) issues associated with implementing structural reforms, and 3) solvency risk in the post-2013 period," said Scotia Capital economists Derek Holt and Gorica Djeric.

"Both S&P and Fitch have Greece at BB+ with a negative outlook, a slightly higher rating. In response to today's downgrade - and Fitch's decision on Friday to place Spain (AA+) on a negative credit watch due to risks associated with the savings banks and the economic recovery - bond spreads of the peripheral European economies have moved up."

LVMH to acquire Bulgari Shareholders of Italy's Bulgari will be living a little more in the lap of luxury in the wake of a deal for control to be acquired by LVMH of France.

The deal values Bulgari at more than €3.5-billion and the share swap represents a hefty premium.

"Bulgari is one of the best known jewellery brands in the world, with lots of potential to grow on the back of LVMH's global distribution reach and financial muscle," Bernstein luxury analyst Luca Solca told Reuters.

Desjardins keen on SNC-Lavalin Desjardins Securities believes shares of SNC-Lavalin Group Inc. present investors with "an interesting buying opportunity," adding it believes the turmoil in Libya has a limited impact on the engineering and construction giant.

""We continue to see promise in SNC's fundamentals as the company demonstrates the ability to take advantage of buoyant market conditions across a variety of industries and in different regions around the world," analyst Pierre Lacroix said after the company's earnings Friday.

"As economic conditions continue to improve, we expect the company will be awarded new projects that could compensate for Libya. In the longer term, further upside should be possible as business conditions return to normal in the Middle East and North Africa. However, the broader impact of volatile commodity prices (eg. oil, copper) and the sustainability of profit margins that are above historical norms remain risk factors that could impact our investment thesis."

Separately, Canadian Imperial Bank of Commerce analyst Paul Lechem boosted his price target on SNC stock to $65 from $62 despite short-term issues.

"We see short-term pressure on the stock due to the ongoing uprisings in North Africa and the Middle East, where SNC derived 20 per cent and 6 per cent of 2010 revenues, respectively," he said.

"These regions are also more profitable than domestic operations, impacting the earnings outlook. Long-term, however, we feel SNC's business remains solid, growing in Canada and South America, with several large prospects in the pipeline."

Boyd Erman's Morning Meeting The Sunday Times in London is reporting that London Stock Exchange Group PLC and TMX Group Inc. might go after Nasdaq once they complete their combination. There's a certain logic to the idea, Streetwise columnist Boyd Erman says.

In Economy Lab today

The Liberals have introduced a new theme to the debate on corporate income taxes: The conjecture that there are 'diminishing returns' to CIT cuts. The politics behind this suggestion are transparent enough, but the economics are extremely murky, economist Stephen Gordon writes

In Personal Finance today

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From today's Report on Business

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About the Author
Report on Business News Editor

Michael Babad is a Report on Business editor and co-author of three business books. He has been with Report on Business for several years, and has also been a reporter and editor at The Toronto Star, The Financial Post and United Press International. His articles have appeared in major newspapers around the world. More

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