03/20/2014 03:51 EDT | Updated 05/20/2014 05:59 EDT

Canadian dollar tests new lows below 89 cents US

The Canadian dollar is testing new levels below 89 cents on Thursday, after a steep slide on Wednesday took it down nine-tenths of a cent to 88.93 US.

At mid-afternoon it was trading at 88.94 US, but it had fallen to 88.76 US earlier in the day. The loonie was last below 89 cents in May 2009.

The main pressure on the loonie came from remarks by Fed chair Janet Yellen on Wednesday that were interpreted by investors to mean that American interest rates could be headed higher earlier than they had thought.

The Fed’s previous guidance had been that the federal funds rate would remain at its current low level of 0 to .25 per cent for a “considerable time” after it ended its monthly bond-buying program.

The Fed has been cutting back on those purchases, a key element of stimulus that had kept long-term rates low, and on Wednesday said it would further taper purchases by another $10 billion US a month to $55 billion.

Yellen defined the “considerable time” at six months or more in her news conference Wednesday.

That would put higher rates on the table by mid-2015, a prospect that drove up U.S. bond yields and attracted investors to the greenback.

In Canada, the prospect of rising rates seems more distant – Bank of Canada governor Stephen Poloz has even talked about lowering rates. That makes the loonie, and Canadian bonds, less attractive to investors.

Canada’s exports have been recovering more slowly than anticipated and there is still a lot of slack in the labour market, leading to a gloomy outlook for the economy.

Nervousness about Chinese growth which helped power Canada’s economy over the last five years also helped weigh on the loonie.

Copper prices have tumbled more than nine per cent since March 6 and there have been worries that commodity financing deals in China could unravel.