How low can U.S. dollar go?

The Canadian dollar soared above US$1.05 for the first time since November 2007 on Wednesday, but the loonie’s rise was really a story of U.S. dollar weakness — a weakness that left economists wondering how much lower the greenback could go.

The American dollar’s retreat came largely as investors continue to gain more of a risk appetite and gravitate toward equities and commodities. Strong earnings results from tech giants IBM Corp. and Intel Inc. on Tuesday night helped feed the appetite for stocks, while continuing strength in oil and gold continues to draw investor cash.

One thing is for certain: the weakness in the greenback has certainly outstripped most expectations, leaving many questioning how much lower can it go. We asked three currency strategists about their thoughts on what happens next.

Camilla Sutton, chief currency strategist, Scotia Capital

• Scotia Capital expects the U.S. dollar to close this year at an even lower level than it is currently at and find new lows next year.
• Scotia’s forecast for the U.S. dollar — currently trading at 0.9535 (US1.0488) against the CAD — is for the greenback to test the USD-CAD all-time low of 0.9058 ($1.104) later this year.
• The real test will come as U.S. monetary policy and fiscal policy continues to weigh on the U.S. dollar, and traders continue to sate their appetites for more risk, said Ms. Sutton.
• Scotia Capital currently has a year end forecast of US$1.05 for the Canadian dollar, and next year expects the loonie to close at US$1.09. ”All in all, we consider ourselves U.S. dollar bearish,” Ms. Sutton said.

David Watt, senior currency strategist and vice president, RBC Capital Markets

• RBC Capital Markets’ forecast is for the U.S. dollar to bottom out at 0.95 against the Canadian dollar this year.
• Mr. Watt cautions that the U.S. dollar has been weaker than expected, and there is a chance for a revision of that forecast. “Going forward I’m not sure whether we are going to revise dramatically the U.S. dollar forecast — if we do revise our forecast, it would be against all currencies, and we would probably put the USD-CAD forecast below 94¢ (US$1.064).”
• The next catalyst for a potentially lower U.S. dollar is the debate on the country’s debt ceiling, said Mr. Watt.
• ”The debate that they had over the government shut down got a lot of market attention, but it was really an irrelevant issue — the debt limit debate is more important and the long-term sustainability of the fiscal situation in the U.S. is of supreme importance,” he said.
• RBC Capital Markets does not expect the U.S. to default on its debt, but Mr. Watt said that if the government pushes the debt ceiling debate till the last minute, “there is certainly going to be heightened concern that they might not deal with the longer term issue either.”

Shaun Osborne, chief FX strategist, TD Securities

• TD Securities’ Shaun Osborne expects the U.S. dollar to trade around 0.96 ($1.0417) against the Canadian dollar through the second half of this year.
• TD Securities is currently forecasting for the U.S. Federal Reserve to start tightening interest rates in the early part of 2012.
• Once that occurs, the U.S. dollar will likely stabilize, and even potentially start gaining slightly against the CAD.
• Given concerns over the U.S. fiscal situation, uncertainty could drive the U.S. dollar lower than it is now. “We underestimated the dollar’s ability to disappoint quite considerably this year, so the risk of more disappointments, more weaknesses, is certainly there,” Mr. Osborne said.

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