The Canadian Press

Bank of Canada governor Mark Carney has received plenty of praise for his quick action on interest rates, but his best magic act of 2009 may have been making the loonie’s bold ascent disappear.

With Thursday marking the end of the year’s trading, those who predicted the currency would reach parity with the U.S. greenback by year’s end were forced to wait a little longer.

The Canadian dollar did gain 0.39 cents Thursday, but still fell almost five cents shy of the parity mark at US95.15¢.

Few were betting on such a feeble ending to the year when the loonie soared in October to a mid-month high of US97.55¢.

Scotia Capital currency strategist Camilla Sutton said the dollar’s October flight stemmed in large part from U.S. currency weakness, rising oil prices and anticipation the Bank of Canada would soon join Australia in raising interest rates.

That’s when Carney sprung into action, warning he had no intention of moving off super-low rates until at least next July and that he had ways of cooling the currency. That took the air out of the loonie’s ascent, chopping two cents off the dollar’s value.

Carney followed two days later with a withering rebuke of currency markets — saying they sometimes “lose their focus” — and chided a reporter for suggesting he was “comfortable” with a US96¢ dollar.

“There’s little question that the barrage of jaw-boning had some impact, and helped slow the rise in the loonie,” said Douglas Porter, deputy chief economist with BMO Capital Markets.

Both Porter and Sutton noted that other factors were also at play, including the fact that the U.S. dollar stopped falling and oil stopped rising.

“If oil had continued to move higher, the dollar would have continued to move higher regardless of what Carney said,” noted Sutton.

In reality, there is only so much a mid-power central bank can do to favourably or negatively impact a market-driven currency. Economists have long noted that previous efforts by the Bank of Canada to prop up the dollar were dismal failures, which is why the institution swore off intervention in 1998.

But Jayson Myers, head of the Canadian Manufacturers and Exporters, believes Carney did succeed in throwing cold water on the market’s bet that interest rates would go higher.

Myers said Canadian firms would prefer a lower loonie, but are as much concerned about volatility — violent swings up and down — because it makes pricing and costing difficult.

“He stopped the speculation, at least for the past several months. The danger was not only that as the U.S. dollar was falling the Canadian dollar was appreciating, but that speculative pressures would be driving it up,” he said.

Now analysts believe Carney is facing an even bigger challenge, likely starting mid-year, when he must seriously consider moving the central bank into a tightening mode and withdrawing extraordinary liquidity measures that helped keep credit flowing during the worst of the recession.

By mid-2010, Carney could be facing a dollar that has stubbornly moved to parity and possibly beyond despite his best efforts. Raising interest rates would give the loonie an additional boost.

How the Bank of Canada reacts depends on the reasons for the loonie’s strength, said Sutton. If it is based on fundamentals — a stronger economy than the U.S., high commodity prices — Carney won’t be overly concerned, she believes.

However, if speculation is again behind the appreciation, Carney may have another blunt talk with markets, or even go beyond hectoring and employ the “tools” he insists the central bank has at its disposal to keep the loonie in check.