Loonie below parity as Chinese growth fuels concerns

by **Josh "Spikey00" Y.** Thu Jan 20, 2011 4:55 pm

TORONTO — The Canadian dollar fell below parity with the greenback Thursday as commodity prices retreated amid fears China will make further moves to slow its economy to deal with inflation.

The currency, which has closed above parity every day since Dec. 30, lost 0.48 of a cent to 99.97 cents US.

Concerns about China's economy strengthened on news that the country's economy grew by 9.8 per cent in the fourth quarter of 2010, up from 9.6 per cent in the previous three-month period.

The strong data fuelled speculation that China's monetary authorities will have to do more to cool the economy and ease inflationary pressures.

"The commodity complex has felt the impact of this as crude oil, copper and gold are (all) down on the day," said Sacha Tihanyi, currency strategist at Scotia Capital.

"This has left the commodity currencies worst hit."

Though separate figures showed that China's inflation did drop in December to 4.6 per cent from a 28-month high of 5.1 per cent the month before, price rises remain stubbornly high and could pose a danger to the Chinese economy if left unchecked.

China has moved several times over the past year towards tighter monetary policy. Just last week, the central bank raised the amount of money banks must keep on reserve.

These moves usually have a short-term negative effect on commodity prices, which have risen sharply over the last year because of strong demand by emerging markets, particularly China. Copper prices in London hit fresh record intraday highs as recently as Wednesday.

But on Thursday, the March copper contract on the New York Mercantile Exchange dropped 12 cents to US$4.25 a pound.

The February crude contract on the Nymex fell $2.62 to US$88.24 barrel. Also driving oil prices lower were data showing that crude inventories increased by 2.6 million barrels last week in the U.S.

Gold prices also weakened as the February bullion contract in New York was down $25.70 at US$1,344.50 an ounce.

Traders also took in data showing that wholesale sales in Canada increased for the fourth consecutive month in November, rising by 1.2 per cent to $45.7 billion.

Statistics Canada said there were gains in all subsectors, with the exception of motor vehicle and parts. Excluding sales for that subsector, which represents 16 per cent of total wholesale trade, wholesale sales grew by 2.4 per cent.

In the U.S., the Labour Department reported that claims for jobless insurance dropped 37,000 last week to 404,000.

Also, a private research group's gauge of future economic activity rose in December, suggesting the U.S. economy may strengthen over the next few months. The Conference Board said that its index of leading economic indicators rose one per cent last month after a 1.1 per cent increase in November.