Bank of Montreal has lowered its growth outlook, attributing the shift to the strong Canadian dollar. BMO has cut its forecast for 2005 GDP growth to 3.2% from 3.5%.

“A sharp appreciation of the Canadian dollar through the fall has prompted a downward revision to our growth outlook,” says BMO

As a result BMO also foresees a slower approach to interest rate hikes. “With revised growth barely above potential through 2005 and given the uncertain impact of a strong Canadian dollar on the economy, we are now projecting that the Bank of Canada will take a more cautious approach to tightening – likely pausing through most of 2005.”

BMO says U.S. economic expansion appears to be on solid ground with growth expected to
exceed 3.5% through 2005. “Though high oil prices and less policy stimulus will restrain domestic demand next year, the stimulating impact of a lower US dollar will boost net exports. This pace of growth suggests that the Fed will continue to tighten policy, albeit at a very gradual pace.”

However, says BMO, despite recent evidence of solid growth, including robust employment gains, the U.S. dollar has steadily lost value. Concern over the huge U.S. trade defeicit is hurting the greenback.

www.bmo.com/economic