Canadian Dollar Loses Another Half a Cent - Fires of Inflation Barely Flicker - More Rate Cuts Now Seem Likely

The United States is not the only country worried about deflation. Another interest rate cut is coming in Canada according to an article in the Toronto Star. Once the market learned that the core rate of deflation decreased to 2.1 percent, the value of the dollar dropped by a half a cent as investors knew this meant that the Bank of Canada would be forced to lower interest rates again in the future. We've seen all summer that changes in the interest rate gap between countries is heavily influencing changes in exchange rates. Although the next rate cut will not be until September 2, investors are selling the Canadian Dollar on the belief it is coming. The big question is: How big will it be? A 25 point drop might cause the Canadian Dollar to rise, while a 50 or more point drop should cause the Canadian Dollar to fall even more.

Important Links

• To learn more about how beliefs about future changes cause prices such as the interest rate to change today see "How Markets Use Information To Set Prices".

• To learn more about how central bank reactions to inflation and deflation influence interest rates see "What is deflation".

• To learn about the link between exchange rates and interest rates see my "Guide to Exchange Rates".

• You may also want to see "The Canadian Exchange Rate" which details the performance of the Canadian Dollar during the first half of 2003.