Canadian Dollar Closes Above US Greenback

For the first time since November of 1976, the Canadian dollar is more valuable in the currency markets than the American Greenback.

Uncertainty in the US economy is causing a stampede away from the dollar and into other currencies like the Euro. That and rumors of a potential move by Saudi Arabia to dump its dollars in favor of Euros has the currency markets very skittish about the future of the US currency:

“Among the G-10 nation currencies, the Canadian dollar is used more than any other as a proxy for oil,” Rebecca Paterson, global currency strategist at J.P. Morgan in New York, said in an interview. “So when oil prices rise, anyone that wants to bet on oil and does not want to play the commodity market turns to the Canadian dollar.”

The price of oil surged above $83 a barrel on Friday morning, closing in on its record high of $83.90, before falling back a touch in afternoon action. Other commodity markets were also flirting with record territory Friday. Gold futures rose to a 28-year high topped $750 an ounce, while other precious metals like copper also rallied.

Soaring oil and gas prices have bolstered Canada's economy and currency in recent years, leading the loonie to be dubbed the petro-currency.

The weakness of the dollar is due to several factors; a large domestic debt, near record trade deficits, the problems in the sub-prime mortgage industry and related housing woes, and low interest rates. 

The one piece of good news is that the rate of inflation appears to be relatively stable which means that the Fed has some room to slash interest rates even further to keep the economy from sliding into a recession. But with oil moving toward the $100 mark, no one is sure what affect the high oil prices will have on the underlying inflation rate. Some analysts believe as long as the increase is temporary and seasonal, the economy should have a soft landing. Others see a serious threat to continued growth as Americans will cut back on spending for consumer goods to pay their energy bills.