While Canadians agonized over the political future of the country last week, international money-market traders took a more material view of the growing storm over Meech Lake. Edgy investors in Japan, Europe and the United States rushed to sell their Canadian dollars the day after Lucien Bouchard’s surprise resignation, apparently alarmed that the growing schism between English and French Canada could adversely affect the Canadian economy. A massive selloff on Tuesday pushed the currency down by more than a cent against the U.S. dollar, to a low of 83.79 cents, before heavy buying
by the Bank of Canada halted the slide. Canada's dollar ended that day at 84.15 cents, down 0.8 cents from Monday, but by the close of trading on Friday had inched back upward to 84.53 cents. To help support the beleaguered currency, the Bank of Canada pushed the bank rate up 25 basis points to 14.05 per cent at its weekly setting on Thursday, carrying the rate to its highest level in almost eight years.
But foreign-exchange traders said that they remain skeptical about the dollar’s stability. Said Michael Andrews, a New York City-based foreign-exchange analyst: “We are advising our clients to steer clear of the Canadian dollar until the political dust settles. It is now a very risky, very volatile currency.” Other financial markets were also affected, with 10-year Government of Canada bonds posting a sharp drop of $2.60 for
every $100 in face value last Tuesday.
The prospect of a divided Canada simply added to existing doubts among potential investors. “The fundamentals of the Canadian economy stink,” Andrews said flatly, noting a continuing high budget deficit and signs that the economy is running out of steam. Even before last week’s bank-rate jump, Bank of Canada governor John Crow had been keeping Canadian interest rates five or six percentage points above the U.S. rates to attract foreign investors. Still, the political uncertainty surrounding Meech Lake seemed certain to keep the dollar under pressure—-and to heighten the prospect of even higher interest rates in the weeks to come.
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