TORONTO – The U.S. Federal Reserve’s interest rate hike could exert downward pressure on the loonie in the midst of its steady drop in recent months as global oil prices have plunged.
The American central bank said Wednesday it’s lifting its key rate by a quarter-point to a range of 0.25 per cent to 0.5 per cent, ending a seven-year period of near-zero borrowing rates.
Ultra low borrowing rates are no longer needed for the U.S. economy to grow. But higher rates – or a rate “tightening cycle”– will have some consequences for the global economy, as well as here in Canada. And that includes knocking the loonie lower.
Scott Guitard, a portfolio manager at Fiduciary Trust Canada, said climbing American interest rates will likely mean the opposite for the Canadian dollar.
Low 70s
Other Canadian economists agreed.
“We expect the Canadian dollar to hit a bottom of 71.4 cents U.S. in the first quarter of 2016,” TD Bank said in recent research note. The loonie was off nearly third of cent Wednesday afternoon at 72.5 cents U.S.
Guitard predicts Canada’s central bank will stick with its decision to hold steady on its key lending rate even if the loonie falls further because of enduring low oil prices. The price of oil fell below $36 a barrel again Wednesday.
Canada’s central bank has cut its own key lending rate twice this year. TD economists said the so-called monetary policy “divergence” between the U.S. and Canada will likely keep the Canadian dollar around the low 70-cent level for some time.
Prime Minister Justin Trudeau, speaking in advance of the announcement, said it was a good sign that the American economy was seeing a resurgence, but promised to examine the challenges that a lower dollar poses for the Canadian economy.
— With files from The Canadian Press
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