1 week Ago
The Canadian dollar coin is pictured in North Vancouver on May 29, 2019. The loonie has surged to its highest level since just after Donald Trump was elected last November. JONATHAN HAYWARD/The Canadian Press The Canadian dollar and other major currencies are rallying against the U.
S. dollar as investors question the safe-haven status of U.S.
investments at a time when President Donald Trump is changing his trade policies sometimes by the day. The loonie surged above 72 US cents on Friday, its highest level since just after Mr. Trump was elected last November.
The currency’s gains this week broadly defied analyst expectations for the loonie to weaken in a trade war . The Canadian dollar, which briefly traded below 68 US cents in early February, has now risen 3.7 per cent this year.
Since Mr. Trump’s so-called “Liberation Day” announcement of steep tariffs on most countries earlier this month, followed by his flip-flop decision on Wednesday to pause the most egregious of those tariffs except for those on China, markets have seen investors flee U.S.
investments – first stocks , then U.S. government treasuries and the U.
S. dollar. There’s mounting fear now that in trying to inflict pain on America’s trading partners through tariffs as a way to force companies to locate manufacturing jobs to the United States, Mr.
Trump’s erratic trade policies will instead hobble the U.S. economy.
“The U.S. economy, which was previously thought to be bulletproof, has shown signs of weakness,” said Mirza Shaheryar Baig, a foreign exchange strategist at Desjardins.
“The market is now concerned the tariff war will disproportionately hit America’s economic prospects more than the prospects of Canada or Europe.” The chaos of Mr. Trump’s tariff agenda over the past week has caused wild swings in both stocks and U.
S. government bonds. The 10-year Treasuries yield, which moves inversely with bond prices, saw the biggest one-week jump in decades to 4.
5 per cent. Meanwhile, despite stock markets rallying on Friday, the S&P 500 benchmark index is down nearly 6 per cent from “Liberation Day,” and 12.5 per cent from its 52-week high.
The exodus from U.S. assets and the widening tariff battle between the U.
S. and China has sparked fears that Beijing, the second-largest foreign holder of U.S.
Treasuries after Japan, could move to unload some of its holding of U.S. Treasuries.
Such a move would amount to “mutually assured financial destruction,” said Mr. Shaheryar Baig, because it would drive down the value of China’s U.S.
-dollar holdings. However, the triple-digit tariffs the U.S.
and China have slapped on each other mean trade between them has come to a standstill, and Beijing may feel it has nothing to lose. “If China is unable to access the American market, why should China continue to hold American dollars,” he said. “It’s certainly a question being asked in Beijing.
” Against the uncertainty surrounding the stability of U.S. assets, both the euro and the Japanese yen have gained ground against the U.
S. dollar for months. As of Friday both currencies had strengthened by roughly 10 per cent since the start of the year.
The euro in particular was boosted when European governments in March embraced massive fiscal spending on defence and infrastructure projects, which is expected to lift growth. Those moves have made the euro a safer bet than the U.S.
for many investors. The loonie was slower to join the currency rally, for good reason. Many economists fear the trade war with the U.
S. will decimate Canadian exporters, drive unemployment higher and tip the economy into recession. Adding further pressure, prices of commodities such as oil, with which the Canadian dollar typically moves in tandem, are down sharply on fears of a wider global recession.
At the same time the Bank of Canada’s policy interest rate is more than 1.5 percentage points lower than the U.S.
Federal Reserve’s benchmark rate, which should make the loonie less attractive than the greenback to investors. “Based on all that you’d expect the Canadian dollar to keep falling, but the loonie is finally getting some respect,” said Sal Guatieri, a senior economist at the Bank of Montreal. The rising loonie could pose a problem for Canadian exporters, who have been counting on a weaker currency to help offset the impact of U.
S. tariffs on their products. However, Canadian companies also source many of their parts from the U.
S. When the Bank of Canada lowered its target interest rate last month, Governor Tiff Macklem warned tariffs and the weak loonie were adding to inflationary pressures. The bank’s next rate decision is April 16.
“This does give the Bank of Canada more wiggle room to cut rates further,” said Mr. Guatieri, though he expects the bank will hold rates steady. As for Canadian consumers, the stronger loonie is unlikely to have them questioning the buy-Canadian movement spurred by Mr.
Trump’s actions, he said, since the Canadian dollar remains weak. “If you compare exchange rates and prices in the two countries, it’s probably still cheaper to buy Canadian and shop in Canada,” said Mr. Guatieri, who estimates the loonie would need to rise closer to 78 US cents to “make people indifferent about shopping in either country.
”.
