Plummeting oil takes steam out of loonie, dollar trades around 96 cents US

A sharp drop in oil prices has clipped the loonie's wings, dropping the Canadian dollar down to last September's values.

The Canadian currency ended the trading day at 95.98 cents U.S., down 1.38 cents US, after falling as low as 95.68 earlier in the day. The slide came was as commodity prices weakened generally and the U.S. dollar strengthened.

Oil fell as low as US$118 a barrel, off 19 per cent from the high of US$147 it touched in mid-July. The drop came amid growing concerns about an economic slowdown in the United States and a belief that high prices have curbed consumer demand.

The U.S. Federal Reserve decision to hold interest rates steady may also have helped undercut the loonie.

But the key influence is the slip in commodity prices, analysts said.

"It think it's largely a commodity price story especially as we've seen oil prices start to look like they are on a downward trend," said James Marple, an economist with TD Bank.

Paul Ferley, an analyst with the Royal Bank, said some of the earlier strength in the loonie was on the back of the strength in commodity prices.

"I think you're seeing some of that strength reverse . . . as a result you're seeing some weakening in commodity-based currencies including the Canada," Ferley said.

There are other factors as well.

"Generally, we're in an environment where the U.S. dollar seems to be on a bit of an upswing and that's adding further fuel to this depreciating trend for the Canada," said Ferley.

Marple said recent economic data suggesting the weaker U.S. economy is undercutting Canadian growth also put downward pressure on the loonie.

"Just last week, we had the monthly GDP contract again, so that made it the third of four months that we've seen the Canadian economy sort of shrink," he said.

"That's shown that the weakness in the U.S. economy is having a real impact on Canada's growth prospects and that's a also a reason that we started to see a bit of underperformance in the dollar."

Statistics Canada has said the economy rode a see-saw in recent months. Real GDP fell 0.1 per cent in May after rising 0.4 per cent in April.

The drop was reflected in lower numbers for the energy, finance, forestry, construction and wholesale trade sectors. Manufacturing, retail trade and the public sector advanced.

The drop in the Canadian dollar may be good news for the country's manufacturers, who have been hit with a triple whammy of a high loonie, rising energy and materials costs and a weakened American economy.

"Over the long term, it will make manufacturers a little more competitive," said Marple. "Unfortunately, they're also dealing with a U.S. economy that's looking very much to be in recession."

Jay Myer, president of Canadian Manufacturers and Exporters, said a downward blip won't be much help.

"If it stays down, it probably will relieve some of the pressure on manufacturers and exporters," he said.

"The big question mark is, is this a bet that the U.S. economy is going to rally? In which case that is extremely good news for Canadian manufacturers."