Canadian dollar soars to 30 year high

While the Bank of Canada didn't raise rates Tuesday, a warning that higher interest rates will likely be needed to rein in inflation sent the Canadian dollar soaring to new 30-year high Tuesday of more than 93 cents US.

"There is an increased risk that future inflation will persist above the two-per-cent inflation target and that some increase in the . . . overnight rate may be required in the near term . . . ," it said.

"The bank did not sugarcoat the message that interest rates likely need to go higher, and soon," said BMO economist Douglas Porter.

The hawkish statement, which helped lift the Canadian dollar by nearly sixth-tenths of a cent to a three-decade-high close of 93.15 cents US, up from 92.56 cents US Monday, also boosted bond yields, and prompted banks to start raising mortgage rates.

It also sparked speculation that the Canadian dollar could be near parity with the U.S. dollar by early next year, even before Bank of Canada governor David Dodge retires in January.

"The probability of seeing the loonie approaching the parity level before governor Dodge leaves office is on the rise," said Clement Gignac, chief economist at National Bank of Canada, which has been predicting the Canadian dollar could be worth $1 US within 12 to 18 months.

CIBC World Markets economist Benjamin Tal warned that, should the U.S. cut rates because of weakness in that economy while Canadian rates are rising, it could push the Canadian dollar to parity or higher, which would be "devastating" for Ontario's and Quebec's manufacturing sectors.

"We lost 200,000 manufacturing jobs in the environment of a strong dollar and a booming American economy, now you will have a softening American economy and an even stronger dollar," Tal said, urging the bank to be cautious of raising rates.

Canadian Manufacturers & Exporters chief economist Jayson Myers said the strong dollar will be a challenge for the industry.

A 50-per-cent appreciation in the dollar is like a 50-per-cent price cut in merchandise exports, which account for 60 per cent of all goods manufactured in Canada, Myers said.

But he and the industry association's president Perrin Beatty joined federal Industry Minister Maxime Bernier at a news conference to applaud the Conservative government's efforts to help the struggling sector, especially the two-year rapid depreciation writeoff announced in the budget.

"This measure in itself will infuse over $1.5 billion of new cash into the manufacturing sector . . . so that's extremely important," Myers said.

While there were no new measures announced at the news conference, Beatty, a cabinet minister in the former Mulroney Conservative government, said the Harper Conservatives have demonstrated they recognize that a healthy manufacturing industry is crucial to the economy.

Labour, however, was not as accepting of the strong dollar, with the Canadian Labour Congress saying it has eroded Canadian companies' share of both the domestic market and of

foreign export markets, and been partly responsible for the "loss of 250,000 reasonably well-paid manufacturing jobs since 2002."

(prepared by Eric Beauchesne/Vancouver Sun)