U.S. markets are also likely in for a tough week as earnings concerns add to existing worries about global economic performance and plans by the U.S. Federal Reserve to start removing some of the stimulus widely credited for sparking sharp gains on equity markets after the lows in early 2009.
North American markets finished the week in the red as energy and mining stocks led the way to a 1.6 per cent slide on the TSX, while New York's Dow industrials dropped 0.6 per cent despite a strong employment report out at the end of the week that bolstered confidence in the American economy.
"There's a whole laundry list of things that are irksome, but what is the main thing unnerving people?," asked Andrew Pyle, senior wealth adviser and portfolio manager at ScotiaMcLeod in Peterborough, Ont.
"I think it is this rapid rise in the value of the U.S. dollar, which has just gone ballistic in the last four weeks and is one of the main reasons why we see oil falling off the map, which again is one of the main reasons why the TSX is under performing."
One of the big reasons for the greenback's surge is the euro currency, which has fallen about 10 per cent against the U.S. dollar since mid-summer. It has weakened against a backdrop of practically non-existent inflation, weak economic data and a vow from the European Central Bank to take action to get the eurozone out of a deep funk, including driving interest rates to near zero.
"The signal they wanted to send was that they were prepared to do anything and everything on the monetary side and the real objective was to push down the euro," said Bob Gorman, chief portfolio strategist at TD Waterhouse.
He observed that one of the most common characteristics of credit crises is countries attempting to reduce their currencies so they can increase exports and spur growth.
"So the real story here is that the euro is down about 10 per cent. The euro is the biggest part of the U.S. dollar index (so), automatically, the U.S. dollar goes up and, in turn, the U.S. dollar denominated commodities come down."
The damage from the higher greenback for Canada has been significant: the commodity-sensitive loonie is below 89 cents for the first time since late March, oil is hovering around $90, down sharply from around $104 during the summer, and copper is at a six-month low at the $3 level. And the TSX mining and energy sectors are both down about 10 per cent over the last month.
The TSX itself is still up 8.7 per cent year to date, off from recent highs of 14 per cent.
Currency woes could also weigh on the batch of third-quarter U.S. earnings that will start coming out this week as many of the big U.S. corporations make much of their profits from overseas markets. Traders will look to results from aluminum giant Alcoa, food company Yum Brands and PepsiCo.
Gorman noted that the rise in the dollar was relatively recent and therefore shouldn't badly impact Q3 earnings, with the damage showing up in fourth-quarter results. However, stock prices could be affected adversely from a weak outlook resulting from the higher greenback.
The Fed also looms large these days as the central bank is set to wrap up its quantitative easing program at the end of the month. The massive bond-buying program had kept long-term rates low and encouraged a huge rally on stock markets over the past few years.
There has also been heightened speculation that the U.S. Federal Reserve could hike interest rates next year, earlier than expected.