Canadian dollar falls as U.S. greenback strengthens

The Canadian dollar was lower Tuesday as economic growth figures for July came in weaker than expected.

A U.S. dollar that is strengthening against most currencies also helped push down the loonie.

It fell 0.27 of a cent to 89.39 cents US in the morning, and closed at a six-month low of 89.24 US.

• The loonie: Who wins, who loses when it takes a beating

Statistics Canada reported Tuesday that gross domestic product was flat in July with a slowdown in oil and gas and mining industries offsetting an improved outlook for autos.

The latest data out of the U.S. shows the American economy was expanding at a 4.6 per cent pace this spring.

That good news on the U.S. economy helped buoy the greenback amid an expectation that the U.S. Fed may start to raise interest rates sooner than expected.

The U.S. dollar is at a four-year high against a basket of global currencies.

That could complicate the pickup in GDP growth south of the border. It makes U.S. exports more expensive and it raises the price of many commodities, including oil and gold, which are traded in U.S. dollars.

Oil prices down $3 a barrel

Oil prices posted their largest drop in almost two years, down more than $3 on the New York Mercantile Exchange to $91.16 US a barrel on Tuesday.

Judith Dwarkin, director of energy resources at ITG Investment Research in Calgary, says stronger output from Libya and especially the U.S. is driving down oil prices.

“It’s basically about available supply, notwithstanding the political hotspots around the world,” she told CBC News.

“The U.S. dollar is also implicated in crude pricing. A rising dollar is increasing the price of oil for the rest of the world,” she added. 

Many economies in Europe are weak, with the European Central Bank reporting Tuesday that inflation was a minimal 0.3 per cent in September. The ECD is aiming for inflation of about two per cent and fears an deflationary spiral unless Europe can conjure some economic growth.

Chinese growth also is on track to slow this year. HSBC Corp.'s monthly purchasing managers' index showed that China's manufacturing activity in September held steady at the previous month's low level – not declining, but barely rising.

Risks to U.S. recovery

There is also nervousness about the impact of rate hikes, with fears that it could force a collapse in stock markets. All of these risks hang over the U.S. expansion.

But Donald Coxe of Coxe Advisors believes technological advances will continue to power the U.S. economy.

"Genetically modified seeds have lowered the price of feed grain and fracking has made the U.S. the No. 1 oil producer and given it the lowest price of gas. That’s a winning combination and that’s why the U.S. economy is outperforming Europe," he said in an interview with CBC's The Exchange with Amanda Lang.

Canadian exports have been rising, with the trade surplus increase to $2.6 billion in July, amid several months of expanding auto exports. The falling dollar helps make Canadian products competitive.

Canada’s loonie is also being hammered by lower prices of key commodities, including wheat, corn and oil. The Scotiabank commodities index released yesterday found prices were at their lowest level this year.

This reflects the limp demand from China and the fact that oil, one of Canada’s most important exports, is getting more expensive for most of the world.

Coxe says he believes commodities will eventually recover.

"The commodity story was a great story until the crash – it was not a commodity crash, it was a financial crash that cut down on global economic activity," he said.

"If we don’t have another financial crash – if the central banks can prevent that – then the excess production is going to be mopped up, because we’re still adding millions of consumers to the world."