Canada's Dollar Falls Most Since 1985 on Plunge in Commodities

March 21 (Bloomberg) -- Canada's dollar plummeted the most in more than two decades this week as investors shunned commodities on concern that a slowing U.S. economy will curb global demand for energy, metals and grains.

The currency dropped 3.3 percent, the steepest since 1985, as commodities slumped. Gold declined 11 percent from a record earlier in the week, and copper posted its biggest weekly decline in 10 months. Crude oil fell more than $13, going below $100 a barrel for the first time since March 5. Commodities account for about half of Canada's exports. The oil sands in Alberta contain the largest crude deposits outside the Middle East.

``This was a huge and dramatic move in commodities,'' said Camilla Sutton, a currency strategist at Scotia Capital Inc. in Toronto. ``We might see further weakness in the Canadian dollar if commodities continue to lose ground.''

The Canadian currency dropped to C$1.0231 per U.S. dollar in Toronto from 98.93 cents the previous week. It touched C$1.0295 on March 20, the lowest since Jan. 23. One Canadian dollar buys 97.73 U.S. cents.

Other currencies of commodity-producing countries also tumbled. The Australian dollar led the plunge, and the Norwegian krone, South African rand and New Zealand dollar fell.

The Reuters/Jefferies CRB Index of 19 commodities dropped 8.3 percent this week, its largest decline since at least 1956.

`Cash Will Be King'

``We are in the process of a change in demand for risky assets,'' said Laurent Desbois, president of the Montreal-based currency fund Fjord Capital, which oversees $90 million. ``With global growth slowing markedly and systemic risk in the financial system, cash will once again be king. This will impact commodities and weaken the commodity currencies.''

Canada's currency, nicknamed the loonie after the image of the bird on its one-dollar coin, surged 17 percent last year on the strength of soaring commodity prices. The gains spurred speculation that the economy was becoming less dependent on the U.S., the nation's largest trading partner, as demand climbed for exports to nations such as China and India.

This year has been marked by signs in government reports that Canada's economy, the world's eighth-largest, is faltering as the slump in the U.S. broadens.

The loonie extended its losses March 20 after a report showed Canada's index of leading economic indicators unexpectedly fell 0.3 percent in February, as manufacturers continued to struggle and the housing market weakened. Economists had forecast a 0.1 percent rise, according to the median of 16 estimates in a Bloomberg News survey.

`Soft Period for Loonie'

``People are expecting a recession in the U.S., and with that recession they're expecting the commodity prices to come to more normal levels,'' said Carl Weinberg, chief economist at High Frequency Economics in Valhalla, New York. ``It means a soft period for the loonie, but that's still a temporary relief. The Bank of Canada still needs to cut rates if it wants to keep the loonie cheaper.''

The currency's strength has made Canada's exports expensive in overseas markets, forcing factories to cut jobs in Ontario and Quebec, the two largest provinces.

The Canadian central bank's policy makers are scheduled to meet next on April 22. They signaled on March 4, when they reduced the benchmark lending rate by 50 basis points to 3.5 percent, that more cuts are likely as they struggle to keep the economy growing amid lower export demand from the U.S. A basis point is 0.01 percentage point.

Retail Sales Report

Canada's retail sales probably grew 1.4 percent in January, from 0.6 percent in the previous month, according to the median forecast in a Bloomberg survey of 11 economists. Statistics Canada will release the report on March 25.

A separate report on March 31 may show the economy expanded 0.3 percent in the same month, from a 0.7 contraction in December, according to another Bloomberg survey.

Canada's dollar has traded within a roughly 5 percent range with its U.S. counterpart since the start of the year, after climbing to a record in November.

``The Canadian dollar could break out of this range if we see further losses in commodities,'' said Doug Porter, deputy economist at BMO Capital Markets in Toronto. ``There was definitely a speculative element to the run of commodity prices in recent weeks, and that froth has been blown up this week.''

The yield on Canada's two-year government security rose 13 basis points to 2.56 percent this week. The price of the 4.25 percent bond due December 2009 fell 25 cents to C$102.77.