Party's over for once red-hot Canadian dollar

TORONTO (Reuters) - The Canadian dollar, a headline-grabber as it soared to modern-day highs last year, now looks like yesterday's news, driven down by lower commodity prices and a faltering world economy.

With the currency now back at levels last seen almost a year ago, analysts see little chance of a return to the days when a Canadian dollar was worth more than a U.S. one.

The new norm -- a Canadian dollar worth less than C$1.04 to the U.S. dollar, or 96 U.S. cents -- will be a boon for manufacturers, but a blow for shoppers and for the inflation-fighting Bank of Canada.

"If commodity prices continue to fall surely the Canadian dollar will as well and our general sense is commodity prices could moderate through the second half of this year," said Sal Guatieri, senior economist at BMO Capital Markets.

"So (parity with the U.S. dollar) will be a stretch unless oil gets back to its record highs."

Canada's role as one of the world's key exporters of oil and global economic growth had helped the Canadian dollar to rally last year to a November high around US$1.10 -- the highest in modern times.

But on Tuesday, the Canadian currency skidded to C$1.0452 to the U.S. dollar, down from C$1.02 a week ago, as falling oil pushed it toward levels that could snowball into hefty losses.

George Davis, Chief Technical Strategist at RBC Capital Markets, said if the Canadian dollar closes below C$1.0378 to the U.S. dollar it would signal that market sentiment toward the currency has shifted to a high degree of bearishness.

"What's happening is we're getting a transmission of the economic cycle and it's starting to emanate further out from just the U.S. economy and out towards other important global economies," said Davis.

"And in an environment where we get a global economic slowdown like that, it tends to be a negative backdrop for the Canadian dollar because the Canadian dollar tends to be more of a pro-cyclical currency more than anything else."

Oil prices fell to $118 a barrel on Tuesday and extended a slide from the mid-July peak above $147 as an economic slowdown eroded U.S. and European energy consumption.

From last November to the start of this week, the Canadian dollar had been in a tight range where one U.S. dollar had been worth between C$1.0342 and 97.24 Canadian cents.

C$ SLIDE WELCOMED BY SOME

"There are definite losers and there are definite winners here," said Stewart Hall, market strategist at HSBC Canada.

"The obvious beneficiary that jumps out is the manufacturing/exporting sector in Central Canada. The big loser is the consumer."

Manufacturers took a big hit as Canadian goods became less competitive when the Canadian dollar spiked 17.5 percent in 2007, and the problems were compounded by a slowing U.S. economy, where the bulk of Canadian exports are sold.

And consumers gained as retailers passed on some of the savings from cheaper imports. That meant Canada escaped the worst of the inflationary pressures that most costly oil brought to other countries.

"If we are going to see a softer profile on the Canadian dollar now, we are entering into an entirely new inflationary environment," said Hall.

A weaker Canadian dollar would boost the prices of imported goods and make deals south of the border much less appealing, he said.

The Bank of Canada said in July, when the currency was sitting about even with the greenback, that inflation would likely jump to its highest point since 2003, peaking at 4.3 percent in early 2009.

The central bank targets inflation in a range between one and three percent.

(Editing by Janet Guttsman)