Loonie closes below parity with U.S. dollar

The Canadian dollar Wednesday closed below parity with the U.S. greenback for the first time since late January and North American markets sold off as the U.S. Federal Reserve unveiled its latest plan to boost the American economy.

Markets slide despite stimulus announcement by U.S. Fed

The Canadian dollar closed below parity with the U.S. greenback for the first time since late January and North American markets sold off as the U.S. Federal Reserve unveiled its latest plan to boost the American economy.

The loonie's official Bank of Canada close was 99.41 cents US, down 1.23 cents from Tuesday's finish.

The Fed said it will sell $400 billion US in bonds maturing in the next three years from its $2.87-trillion portfolio and use the proceeds to buy U.S. Treasury bonds with six-to-30 year terms. The move is aimed at cutting longer-term interest rates to encourage consumers and businesses to spend.

Stocks then plunged because investors saw a grim forecast behind the Fed's plans.

The S&P/TSX composite index ended the day 254.87 points, or 2.1 per cent, lower at 11,955.01. That was its lowest close since Aug. 8.

The Dow Jones industrials fell 283.82 points, or 2.5 per cent, to 11,124.84, the Nasdaq composite index was down 52.05 points, or two per cent, to 2,538.19 and the S&P 500 index dipped 35.33 points, or 2.9 per cent, to 1,166.76.

Financial analysts said stocks dropped as investors came to the conclusion that the Fed expects the economy to take years to recover.

"It's being viewed as perhaps an admission that this is a longer-term issue that the U.S. economy is facing and not one that's going to be solved over a couple of years," said Oliver Pursche, president of Gary Goldberg Financial Services.

"When the Fed decides to take this type of action, it's because things are serious," Pursche said.

As money moved out of stocks, investors bid up the greenback as they bought U.S. government bonds as an asset that can be easily cashed.

The move was the Fed’s third program of Treasury bond purchases in recent history and came on top of its unprecedented promise on Aug. 9 to keep interest rates low until 2013.

Some analysts question whether the Fed can really do more to fire up the economy.

"At the end of the day, I'm not sure there is much more they can do, they've already pulled down yields by saying that they were going to keep short-term interest rates at effectively zero for another two years," said Norman Raschkowan, North American strategist at Mackenzie Financial Corp.

"The bigger issue now is the political mess in the U.S. and Europe and the fact you need people to regain confidence in the political leadership and the ability of politicians to work together to address the problems."

"[There] is perhaps a recognition that the Fed is running out of firepower and resorting to some arcane techniques resurrected from the vault of history," said Lawrence Creatura, portfolio manager at Federated Investors.

Investors may also be doubting the Fed's ability to drive down Treasury yields much more from their current levels.

"Let's face it, with a 10-year Treasury offering 1.90 per cent, there's not a whole lot of room for there to be a major impact," said Mark Lamkin, the head of Louisville, Ky.-based Lamkin Wealth Management.

Loonie last closed below parity Jan. 31

The Canadian dollar has not closed below parity since Jan. 31, when it finished at 99.85 cents US. It has traded intraday below parity since then.

The loonie's dip came as Canada's annual rate of inflation crept up to 3.1 per cent in August. However, some economists see the inflation spike as temporary.

Bank of Canada governor Mark Carney said earlier this week that he was not worried about inflation pressures, meaning a Canadian interest rate increase appears not in the cards.

Analysts said the Fed's move will not lower the value of the greenback because it will not require printing new money, Reuters reported.