Here's why the Canadian dollar is at its lowest level in two years

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Here's why the Canadian dollar is at its lowest level in two years

The loonie hit a two-year low last week.

The Canadian dollar could slide as low as 73 US cents, says an expert.

High inflation and the Fed's (US Federal Reserve) monetary policy tightening explain the tumble of the Canadian dollar, which ended the week at 75.15 US cents.

Investors around the world saw the deteriorating economic outlook and flocked to the US dollar, the benchmark.

There has been an absolute influx of money into the US dollar because it is the main safe haven and the US economy is much stronger than the others, said Adam Button, chief currency analyst at ForexLive. /p>

Until last week, the market was telling us that both [US and Canadian central banks] would stop [rates] at around 4%, Button added. Now the market is telling us the Fed can go higher, but the Bank of Canada might not be able to follow suit.

If that happens, even more money will be pumped into the US dollar. That's why this expert wouldn't be surprised to see the loonie dip below 73 cents by the end of the year. Canadians may not realize how serious the situation is.

Fed rate-linked investment prices suggest investors believe the U.S. bank rate will eventually reach 4% or even 5%.

The loonie appears to be taking a dip as anything other than the U.S. dollar is doing badly right now, Button continued. However, compared to other currencies such as the Euro, British Pound and Japanese Yen, the Canadian dollar has actually gained ground this year. But it is falling against the US dollar.

The persistent and high inflation in the United States suggests that the Bank of Canada should have to raise its interest rate significantly. The US Federal Reserve is expected to do the exact same thing next week, raising its benchmark rate by at least 75 basis points to 3.25%, if not more.

Rates will rise [in the coming weeks] and they will stay high longer than expected, believes Audrey Childe-Freeman, currency strategist at Bloomberg Intelligence.

If the Fed rate goes to 4.5% next year, as investors expect, that's much higher than the Bank of Canada is likely to be able to do. This is what explains why the gap between the currencies of the two countries is widening.

Another reason for the fall of the Canadian dollar is linked to lower prices for commodities like oil and gold, as the outlook for the global economy darkens.

Commodities are weak, in large part because the market is (finally) coming to terms with the fact that the outlook for global demand is clouded, mentioned for his part the chief of the North American currency strategy at CIBC Capital Markets, Bipan Rai.

It's important for a key indicator like the Canadian dollar, he said. he added.

The price of oil has fallen about $30 a barrel since June, which under normal circumstances would be more than enough to drag the loonie down.< /p>

With information from Pete Evans of CBC News

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