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Author`s name Alex Naumov

Loonie takes biggest nosedive in 36 years

The loonie took its steepest plunge in three and a half decades yesterday, but analysts aren't ready to declare an end to the era of an overvalued currency.

Once again, the Canadian dollar has been sideswiped by the volatile realignment of world currencies. Last week, the global churn took the loonie to a high of $1.10 (U.S.), but yesterday, the move was in the opposite direction, with traders shaving more than 2 full cents off the currency.

It closed at $1.0322, down from 1.0607 on Friday. While the Bank of Canada was closed yesterday in lieu of Remembrance Day and did not provide official exchange rate figures, according to Bloomberg and Reuters it's the biggest dip since 1971 - even though nothing of consequence happened in Canada's economy yesterday.

"Gold is down, oil is down sharply. And we were overcooked last week. That's why we are falling more than you'd expect," said George Vasic, strategist for UBS Securities Canada Inc. "I would view this simply as a trading reversal based on what was simply a trading overshoot, just for the two weeks prior."

In a typical cycle, a currency trends in one direction for about four or five years, then overshoots as trading moves out of line with economic fundamentals. Then it slowly shifts direction, Mr. Vasic says.

But the Canadian dollar is not at the tipping point now, he added. He sees the currency holding relatively firm until the middle of next year, and maybe even appreciating to $1.10 again.

"You certainly cannot say this is the turning point for another five-year downward move in the Canadian dollar . . . And the reason for that is, do we really expect the U.S. dollar to rally in this kind of environment?"

While the European Central Bank and the Bank of Canada may eventually move to cut interest rates, the U.S. Federal Reserve will no doubt move first in order to prevent a recession, he said - further weakening the greenback and conversely strengthening other currencies.

The loonie's steep slide yesterday was partly linked to a growing nervousness about the global economy's ability to withstand a U.S. slowdown, said David Watt, a senior currency strategist at RBC Dominion Securities Inc., theglobeandmail.com reports.

The credit-related concerns along with the Canadian dollar's rapid ascent to modern-day highs have also created an environment ripe for profit-taking, said Scotia's Bradley.

"I wouldn't be surprised by the end of this week if you see quite a reversal in the speculative positions on the (International Monetary Market)."

Comments last week by Canadian Prime Minister Stephen Harper, Finance Minister Jim Flaherty and various U.S. investment firms saying the Canadian dollar is overvalued have added downward pressure to the currency, Bradley said.

Also, oil and gold prices were off their recent highs, making the Canadian dollar less attractive to investors, as Canada is a major commodities producer and exporter, said Matthew Strauss, senior currency strategist at RBC Capital Markets.

But he said that commodities prices were a secondary story, and that risk aversion was the main cause of the Canadian dollar's fall, Reuters reports.

Source: agencies

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