03/19/2014 11:59 EDT | Updated 05/19/2014 05:59 EDT

Canadian dollar slides below 89 cents US

The Canadian dollar fell heavily for a second day, dropping to 88.88 cents US in late trading before closing at 88.93 US on remarks by Fed chair Janet Yellen and Bank of Canada governor Stephen Poloz.

The loonie tumbled 0.68 of a cent on Tuesday, closing at 89.79, after Poloz said interest rates may have to remain low to keep the Canadian economy growing. The dollar last closed above parity with the greenback in early February 2013. At mid-afternoon, it had recovered slightly to 89.58 US, but Yellen's hawkish comments on U.S. rates dimmed prospects for the loonie.

The Fed announced that it will further cut its monthly bond purchases by another $10 billion to $55 billion US.

Yellen gave a mixed assessment on the U.S. economy, which has shown significant strength in the past two months, despite the drag of a bitterly cold winter.

But in her press conference, Yellen explained that the Fed was dropping an unemployment rate of 6.5 per cent as a definitive marker for raising rates and would instead balance a range of factors, including inflation.

Markets interpreted this as a hawkish stance, believing she could raise rates by mid-2015.

On Wall Street, the Dow Jones industrial average fell 48.79 points or 0.3 percent, to 16,287.4, the S&P 500 lost 4.43 points or 0.24 percent, to 1,867.82 and the Nasdaq Composite dropped 11.02 points or 0.25 percent, to 4,322.293.

The TSX was down 34 points on the news and the dollar slid steeply to below 89 cents US. 

The U.S. recovery has pulled money out of other markets around the world, including Canada’s and is partly responsible for the falling Canadian dollar.

In a question and answer session in the speech to bankers on Tuesday, Poloz said that a rate cut by the Bank of Canada could not be ruled out as a stimulus measure.

But a report from Royal Bank economists on the Canadian economy was more bullish. It predicted economic growth could hit 2.5 per cent this year and 2.7 per cent next year.

That's slightly stronger than the Bank of Canada's call for 2.5 per cent growth in both years.

But it said the loonie would continue to fall, predicting it will settle around the 87 cent US level this year and dip to 85 cents in 2015.

RBC chief economist Craig Wright said he believes Canadian exporters will begin to benefit from a lower loonie later this year, as the cheaper dollar makes Canadian goods more competitive.