TORONTO – The loonie headed lower Thursday as markets began to adjust to the surprise news that the U.S. Federal Reserve plans to keep pumping up the U.S. economy with $85 billion a month of monetary stimulus.
The Canadian dollar dipped 0.38 of a cent to 97.45 cents U.S. after flirting with the 98-cent mark in the morning.
The U.S. dollar sold off in the immediate aftermath of the Fed statement Wednesday as investors priced in the prospect of more dollars swirling around financial markets.
The $85 billion a month in purchases by the U.S. central bank have been part of an effort to stimulate the economy by keeping long-term loan rates low. The move has made borrowing easier and helped boost stock markets around the world.
Since May, Fed chairman Ben Bernanke has warned that the stimulus will eventually run out on signs that the U.S. economy is improving.
The markets had been expecting the central bank to announced that it would begin tapering the purchases, but instead, Bernanke said he wasn’t convinced the economy was strong enough to support such a move.
Philip Petursson, managing director of the portfolio advisory group at Manulife Asset Management, said the Canadian dollar is overvalued.
“The fundamentals are tough to justify the dollar at where it is,” Petursson said. “It’s been held higher than where it should be, based on higher oil prices that I don’t think are sustainable, a rally over the last couple of days in gold, silver, copper but I don’t think that’s a long-term trend.”
Petursson said the long-term outlook is that commodities will head lower and bring the Canadian dollar down with them.
“You certainly don’t see it in the Canadian economic data,” he said of strength in the loonie. “The economic data would indicate that the Canadian dollar should be weaker than where it is today.”
The Fed decision sent commodities up sharply Wednesday, and most retained that strength on Thursday. December bullion surged $61.70 to US$1,369.30 an ounce, while December copper was ahead seven cents to US$3.35 a pound. But the October crude contract fell $1.68 to US$106.39 a barrel