Strong Canadian dollar to hit Canada economy more than mad cow

The Canadian dollar, at a 10-year high versus the US currency on Tuesday, is weighing heavily on Canada's once powerful economy, which was already reeling from a series of one-off shocks this year.
Analysts said the currency's rise to C$1.2905 to the US dollar, or 77.49 US cents, would slow exports and hurt manufacturing well into next year.
The Canadian currency has risen more than 20 percent this year, a climb that hit the economy more than the other shocks - a series of events including last week's case of mad cow disease in the United States and this week's news the animal might have been born in Canada.
"It has a much more dominant impact on Canadian exports than the mad cow scare ... and through this year and next year we will see the peak impact of the Canadian dollar on exports," said Sal Guatieri, a senior economist at Bank of Montreal.
Tuesday's rise in the Canadian dollar reflected the slump of the US currency after reports on US consumer confidence, manufacturing and home sales all missed their marks, unsettling a foreign exchange market already worried by the mad cow case.
But analysts said the Canadian dollar will likely retain most of its latest gains, if only because Canadian interest rates are so much higher than their US equivalents.
The Canadian overnight rate is 2.75 percent while the equivalent federal funds rate in the United States is 1 percent.
"The Bank of Canada knows they have wide interest rate spreads which are helping support the Canadian dollar and they want to get that interest rate down," said David Watt, a financial economist at BMO Nesbitt Burns.
"And one way to do that is to continue to talk about the risk of the strong Canadian dollar to the Canadian economy and make an argument for cutting interest rates," he said.
Analysts believe there is about a 60 to 70 percent chance that the Bank of Canada will cut interest rates by 25 basis points when it next sets rates on January 20, due mainly to the strong dollar but also because of steadily declining inflation.
The Canadian economy suffered a number of setback in 2003, ending its long run as the strongest performer in the Group of Seven rich industrialised countries.