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Bonds News

Canadian dollar hits parity: how high will it go?

OTTAWA, Sept 20 (Reuters) - The Canadian dollar will push beyond parity with the U.S. dollar in coming weeks, dealers said on Thursday, but they were divided over just how high it will go and how long the rally will last.

The Canadian currency reached parity with the greenback briefly on Thursday for the first time in 31 years.

Its move higher has been sudden. Just two weeks ago, a Reuters poll of foreign exchange strategists forecast the currency would back away from a bid for parity.

Dealers are now wondering whether the Canadian dollar -- known as the loonie because of the bird engraved on the one-dollar coin -- will move on to test the record high of C$0.94 it last reached in 1957, and when a correction will come.

“Once parity is achieved, there is nothing stopping the loonie,” said Martin Lefebvre, senior economist at Desjardins Securities.

At 2:00 p.m. (1710 GMT), it was at C$1.0017 to the U.S. dollar, or 99.83 U.S. cents, up from C$1.0152 to the U.S. dollar, or 98.50 U.S. cents at Wednesday’s close.

“I think the road forward now, the fundamentals are so strong that we’ll see Canada continue to strengthen,” said Steve Butler, currency strategist at Scotia Capital in Toronto.

“And I don’t want to say, well we’re going to C$0.95 or we’re going to C$0.90, because it’s much too soon to call a top, but I do think we have some further room for Canada to appreciate.”

Butler said he would not rule out a temporary pullback to C$1.01 or C$1.02 (99 or 98 U.S. cents).

The U.S. dollar has weakened against most major currencies. But the momentum for Canada is also coming from the narrowing of the spread between U.S. and Canadian interest rates after the U.S. Federal Reserve cut the federal funds rate by 50 basis points this week to 4.75 percent, bringing it closer to the Bank of Canada’s 4.50 percent key rate.

Canada is a major oil producer and soaring oil prices and a generally strong economic performance have also buoyed the loonie.

“Our models are showing oil prices have to stay above $82 cents for a long period for parity to be sustainable,” said Lefebvre.

Lefebvre expects the currency to skid by the beginning of 2008 but sees a return to parity by the end of next year or in 2009 as Asian economies crank up demand for commodities.

Gareth Sylvester, senior currency strategist at HIFX Plc in San Francisco, said a strong economy had been the original catalyst for the Canadian dollar rally but the move over the most recent sessions had been technically driven.

He saw possible moves to C$0.9940 and C$0.9860 as “very realistic price targets” and a range in the next two to three months of C$0.98 to C$1.0450.

The Canadian dollar is in the final stages of a broader macro move that began at C$1.61 in January 2002, he said. “We do feel we’re in the final stages of that move.”

Benjamin Tal, senior economist at CIBC, said the currency would shoot over the next month to C$0.99 or C$0.98 and then retreat by about five cents by the end of 2008. His forecast is based on an expectation the U.S. economy will fall into recession, or a near recession.

In the longer term, the U.S. dollar will have to rebound at some point, said Dustin Reid, senior foreign exchange strategist at ABN AMRO in Chicago. “It can’t continue into oblivion forever.” He forecast that its cyclical downturn would stop in late 2008 or early in 2009.

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