Interest rate fears hang over markets, push down dollar

Fears of a U.S. interest rate hike hung over the markets a day after steep stock selloffs, with the Canadian dollar pushed down by a strong greenback.

The Canadian dollar continued its fall against the U.S. dollar,closing at 78.42US cents, near its lowest level this year.

"The loonie is down for a whole host of trends and the biggest trend is a strong U.S. dollar against all major currencies," saidCamilla Sutton, chief foreign exchangestrategist atScotiabank.

"The real takeaways are the [U.S. Federal Reserve is]likely to tighten rates and other central banks arent. We have oil prices that are moving to new lows and we have sentiment favouring a higher U.S. dollar and all of it has come together and weighs heavily on the Canadian dollar," she said.

She predicted the loonie would fall to 75 cents US.

The euro was at its lowest point since April 2003, closing at $1.06US. The euro is down 12per cent this year against the U.S. dollar and many traders expect it will fall to parity with the greenback.

• TSX, Dow plunge on worries about U.S. rate hike
• U.S. unemployment falls to 6-year low of 5.5% in February

The S&P, a broad index covering 500 stocksrepresentative of the U.S. economy, has been trading at or nearrecord levels since mid-February on strong corporate earnings and optimistic economic predictions for the U.S.

The Bank of Canada cut interest rates in January in an effort to stimulate the Canadian economy and the European Central Bank has begun an even more extreme stimulus plan, buying up $80 billion Cdn of bonds every month.

Meanwhile, the Fed appears to be heading in the opposite direction. Fed chair Janet Yellen has said she can afford to be patient on rate hikes, but she has set some benchmarks for when shell move, among them an unemployment rate of 5.5 per cent.

U.S. jobless rateat 5.5%

The U.S. met that target last Friday, with a solid pace of jobs growth that has continued for six months. Other economic indicators also appear to be pushing the Fed to move sooner, rather than later, including strong consumer confidence and a growth rate in the fourth quarter that is somewhere between 2.2 per cent to 2.6 per cent, according to the latest estimates.

Most analysts believe the rate hike will come in June, though the Feds open market committee meets next week and may give clearer guidance on its plan.

In anticipation of that day, investors are buying up the U.S. dollar, pushing it up against the euro and the loonie.

Theyre also anticipating a hit to U.S. stocks, which have seen a six-year bull run since their low in March 2008.

On Wednesday afternoon, the S&P was up most of the day, but ended lower, losing four pointsto 2040, the Dow fell 27 points to 17,635and the Nasdaqdropped nine three points to 4849.

The TSX was up 90points at 14,731. Yesterdays rout took Toronto stocks to the same level they were at at the beginning of the year.

Canadian stocks are more susceptible to the price of oil and other commodities, because the strong mining and energy sectors.

The West Texas Intermediate oil contract was flat today at $48.37 US a barrel. The price did not dip substantially, despite a report from the U.S. Energy Information Administration that crude oil inventories were at their highest level since 1982.

The strengthof the loonie over the next few months could depend in part on Canadas employment picture, according to Rahim Madhavji of Knightsbridge Foreign Exchangein Toronto. Statistics Canada is set to report the latest unemployment numbers this Friday.

Shaun Osborne, chief foreign exchange strategis atTD Securities,said theres been a return to volatility in the financial markets after a calmer period.

"We havent been in this situation for quite a period... Over the past four or five years, we havent had this divergence in growth outlook between Europe and the U.S.," he said in an interview with CBC's The Exchange with Amanda Lang.

Similarly, it's a long time since Canadian and U.S. monetary policies were headed in opposite directions, he added.