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Winnipeg Free Press - PRINT EDITION

Loonie above US$1.03 as Fed opens cash tap

By: Staff Writer

Posted: 09/14/2012 1:00 AM | Comments: 0

OTTAWA -- Within seconds of the noontime announcement by the U.S. central bank that it was taking yet more extraordinary measures to rescue the American economy, the news hit home in Canada.

Immediately, stock markets and the loonie started to climb, the latter easily surpassing another milestone above US$1.03.

The rally was somewhat remarkable, given the move long had been telegraphed, but it demonstrated how quickly and directly U.S. policy impacts its northern neighbour.

Canadian economists mostly praised U.S. Federal Reserve chairman Ben Bernanke's move, but there were a variety of views on what it ultimately means to Canadians.

At the outset, there is no doubt Bernanke has made it more difficult for his northern counterpart, Mark Carney, to maintain his monetary-tightening bias in the face of the U.S. central bank opening the money spigot, they say.

The Bank of Canada said there would be no public reaction to the U.S. Fed's move.

Not only did Bernanke extend his current quantitative-easing program, but he added to it by promising to buy up US$40 billion in mortgage-backed securities each month and projected further -- to mid-2015 -- his forecast on when he might be ready to start raising interest rates. The U.S. dollar plunged on the news while other currencies, including the loonie, gained momentum.

"This makes hawkish policy talk by the Bank of Canada totally inappropriate at this juncture," said Derek Holt, vice-president of economics with Scotiabank.

Holt said the Canadian central bank will be constrained because it will fear further strengthening of the dollar could deal a death blow to exporters. Canada set a record for monthly trade deficits in July with a $2.3-billion shortfall, the dollar being partly blamed for making some goods too expensive in foreign markets. That, in conjunction with the air being let out of the housing bubbles in Vancouver and Toronto, creates a short-term risk the economy may stall in the upcoming quarter, Holt said.

In his news conference, Bernanke took pains to caution that his program, termed QE3 because it is his third kick at the can on quantitative easing, will help, but can't work miracles.

In particular, he cannot offset the shock of the fiscal cliff, which is what would happen if warring politicians in Washington don't get together this fall to extend programs and tax cuts helping keep the economy out of recession.

-- The Canadian Press

Republished from the Winnipeg Free Press print edition September 14, 2012 B6

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