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Pastimes : Ask Mohan about the Market -- Ignore unavailable to you. Want to Upgrade?

To: Michael who wrote (8442)	11/18/1997 8:30:00 AM
From: John Hunt	Respond to of 18056

Michael, Works for me ... Must be a net problem ... Here is the text. John *********** Bank of Canada lets dollar sink Analyst warns of steep rate increase to bring back buck from near-record low Eric Beauchesne The Ottawa Citizen The Bank of Canada made no effort yesterday to rescue the sinking dollar, which ominously slipped closer to its all-time low of less than 70 cents US. But when the the bank does act, it will take steeper rate increases than thought earlier to give the dollar the lift it wants, one analyst warned. The dollar hit a low of 70.42 cents U.S., before bobbing back to close at 70.59 cents U.S. at day's end. That's still down nearly a fifth of a cent from last week and not much more than a cent above its all-time low close of 69.24 cents U.S. nearly a dozen years ago. "The market seems to be demanding a much more dramatic realignment between Canadian and U.S. short-term interest rates," warned Jeff Rubin, chief economist at investment firm Wood Gundy. The bank needs to raise Canadian rates closer to, or back above, U.S. levels to boost the value of the currency, he said. The bank has said it wants a higher dollar, and higher rates, as a pre-emptive strike against inflation. "As the market demands successively higher interest rates to support the currency, look for the bank to get less bang for its buck from its next few rate hikes," Mr. Rubin said. "What once would have been dressed as a pre-emptive strike will now wear the appearance of a reactive defence." He and other analysts agree the bank is reluctant to raise rates until it is sure the dust has settled from the turmoil in financial and stock markets. Canadians will get a better view of the bank's thinking tomorrow when it issues its semi-annual monetary policy report, which will be followed by a news conference by governor Gordon Thiessen. The bank has already raised rates twice this year but has been unable to spark a sustained rally in the currency. It has warned that more rate increases are needed. "There's little doubt that the bank would have already raised rates in the Canadian dollar's defence had it not been fearful of draining liquidity at a time of plunging equity values," Mr. Rubin said. Higher rates would add to business costs and dampen consumer spending, reducing corporate profits and, in turn, further undermining the shaky stock market. But other analysts say the latest weakness in the currency is not as threatening as it was late last month, so there's not the same pressure on the bank to defend the dollar. There hasn't been any panic selling of the dollar this time; in fact, there has been buying of the currency, noted Mario Angastiniotis, economist with MMS International. So there are pressures both ways on the currency and the bank is letting the market decide the dollar's level. "If we began to see one-way flows pushing the currency lower, and there was no interest in buying the currency, that would put pressure on the bank to raise interest rates," he said. Last month the bank spent $1.15 billion U.S. from its its dollar-defence fund of foreign currencies to buy up the currency, which over a period of a few days was being dumped in markets at lower and lower prices. But Mr. Rubin said the gap between Canadian and U.S. rates is now "too great to support a stronger dollar" and that the bank will eventually succumb to the pressure to raise rates. Canadian short-term rates, historically higher than U.S. rates, have fallen over the past year as much as several points below those south of the border. Long-term rates are now also below those in the U.S., although the gap is less. It will take at least a half-point increase in rates by the Bank of Canada, double what was expected earlier, to lift the dollar, Mr. Rubin said. The bank will try to satisfy markets with a quarter-point rate hike, he said, but there will be "further challenges from markets and further grudging rate hikes by the bank."