[A-List] Go crazy: Dollar sinks below loonie

[Macdonald Stainsby <mstainsby@xxxxxxxxx>]

Clip:
"The rise in value of the Canadian dollar "is an energy story," said 
Busch. With crude oil futures trading at more than $83 U.S., investment 
capital is pouring north to help extract oil from so-called tar sands, 
also known as oil sands, in the province of Alberta.

"The average cost to produce a barrel from tar sands is $40 to $45," 
Busch said. The current world oil price "puts oil development from tar 
sands on steroids."

Regardless of currency exchange rates, investing in Alberta is a bullish 
trend, boosting demand for the loonie."

[end clip; full below]
Go crazy: Dollar sinks below loonie
Bill Barnhart | Market report
September 21, 2007
http://www.chicagotribune.com/business/chi-fri_barnhartsep21,0,6422707.story

They broke out the Moosehead beer Thursday in the Chicago office of BMO 
(Bank of Montreal) Capital Markets.

For the first time in nearly 31 years, it look less than one Canadian 
dollar to buy one U.S. dollar. The loonie, as the Canadian currency is 
known, broke the greenback.

"We've got Canadian beer, Mexican salsa and American-made chips," said 
Andrew Busch, global foreign exchange strategist at BMO.

"It's a real milestone number," said Gary Klopfenstein, senior managing 
director for currency management at Mesirow Financial in Chicago.

"The force and the momentum behind the market, with interest rates and 
oil, there's an awful lot of inertia taking the U.S. dollar lower in 
Canada right now."

Also Thursday, the euro broke above $1.40 for the first time, as 
financial markets continued to adjust to Tuesday's surprise cut of half 
a percentage point in U.S. interest rates by the Federal Reserve.

It was easy to blame the weakening dollar on the Fed, especially among 
Fed critics who say Tuesday's rate cut will hurt the U.S. economy and 
the standing of America in the global economy, as reflected in the value 
of the dollar. But there's more to the story.

There's no doubt that in the last three days the Fed cut accelerated the 
long-standing trend of dollar weakness. Cutting short-term U.S. interest 
rates while other major countries are holding rates steady naturally 
makes dollar-based deposits relatively less desirable in global money 
markets.

If the dollar continues to weaken, as many analysts and traders expect, 
imports sought by U.S. consumers could cost more, increasing 
inflationary pressures here and further taxing consumers already facing 
higher energy costs.

But the Federal Reserve rate cut is just one factor in recent currency 
moves between the U.S. and its principal trading partners.

"There are times when interest rate differentials [among nations] drive 
currencies. This year has generally not been one of them," said Greg 
Anderson, director of foreign exchange strategy at ABN Amro in Chicago.

The rise in value of the Canadian dollar "is an energy story," said 
Busch. With crude oil futures trading at more than $83 U.S., investment 
capital is pouring north to help extract oil from so-called tar sands, 
also known as oil sands, in the province of Alberta.

"The average cost to produce a barrel from tar sands is $40 to $45," 
Busch said. The current world oil price "puts oil development from tar 
sands on steroids."

Regardless of currency exchange rates, investing in Alberta is a bullish 
trend, boosting demand for the loonie.

Indeed, the robust growth of economies around the world has been putting 
upward pressure on oil prices, quoted everywhere in U.S. dollars, and 
downward pressure on the dollar, even without a Fed interest rate cut.

The growth of international economies spells trouble for the dollar for 
a more complex reason that puts the Fed in an ironic position, said 
Anderson.

He noted that the dollar rallied against major currencies in early 
August, when fears about subprime mortgage lending and a credit crunch 
in the U.S. reached a fever pitch. The threat to the U.S. economy from a 
sudden lending crisis appeared to drive the U.S. dollar higher.

This seems like an odd fate for the dollar. But the move indicated that 
U.S. investors had grown skittish and were investing fewer dollars in 
international investments, notably emerging markets funds. This 
nervousness resulted in fewer dollars flowing into countries such as 
Brazil, Russia, India and China, the so-called BRIC nations that have 
become major players in currency markets.

The BRIC nations have been converting about a third of their dollars 
into euros to diversify the currencies they hold, Anderson said.

After the Fed cut rates Tuesday, U.S. investors quickly resumed their 
love affair with emerging markets funds, driving dollars into the hands 
of nations that just as quickly returned to converting their dollars 
into euros.

The amounts involved in this dollar selling are about $15 billion a 
month, on top of another $15 billion a month being sold by speculators, 
Anderson said.

"The reason the dollar is losing ground is because equities are 
rallying," he said. "We're piling money back into emerging markets."

In other words, more optimistic U.S. investors, responding to a 
market-friendly interest rate cut by the Federal Reserve, generate a 
cheaper dollar and criticism of the Fed.

Moreover, in the short run, currency movements can be self-fulfilling.

"I think the move above $1.40 in the euro is going to continue that 
expansion" into international equities, said Klopfenstein.

"There will be heightened volatility. When everybody can't come up with 
a reason for the dollar to go up, it probably will."

--
Macdonald Stainsby
Coordinator, http://oilsandstruth.org
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