The U.S. and Canadian dollars are both looking weak against the world’s other major currencies, TD Economics says.

”Market sentiment on the state of the U.S. economy has soured noticeably over the past month, and both the U.S. dollar and the Treasury market have reacted accordingly,” TD points out in a research note.

“The greenback in particular has been in a true free-fall against most major currencies,” it says, noting that since November 20, when the slide in the U.S. dollar truly gathered steam, the U.S. currency has shed almost 3.6% of its value against the euro, 2.5% against the Yen, and 3.4% against the Pound Sterling.

“Canada’s markets have been taken along for the ride,” it notes. “The Canadian dollar’s behaviour over the past few weeks in particular is bound to have raised a few eyebrows – and constitutes a clear rebuttal of the conventional wisdom, which views broad-based U.S. dollar weakness as a recipe for Canadian dollar strength against the greenback.”

“Yet that is not how it has played out,” it notes. “The Canadian dollar has actually weakened a notch against the U.S. dollar over that time frame,” and it has been the worst performing of all the major currencies over the past couple of weeks, it adds.

Looking ahead, TD expects that the U.S. economy is in for a few more quarters of below-potential growth. This should be met by rate cuts, it predicts.

“As for Canada, the economic backdrop has not been particularly rosy either – and that should not come as a surprise. To expect the Canadian economy to emerge unscathed from the slowdown in the U.S. is the stuff of vivid dreams, not hard reality,” it says.

“Already, Canadian economic growth has been falling short of the Bank of Canada’s expectations, and is likely to continue to do so – a fact that the Bank of Canada recognized in this week’s statement.” TD believes that the Bank’s economic outlook is overly optimistic, and that it will eventually be compelled to cut interest rates as well.

“With both North American economies still in slow-growth mode, and with both central banks likely to be easing monetary policy in the first half of 2007, the bond market rally still has some room to run – although the markets could be vulnerable from a near-term perspective. Similarly, the U.S. dollar is likely to continue to lose ground in the months ahead,” it concludes. “While we expect the Canadian dollar to depreciate only modestly against its U.S. counterpart, the real story is the Canadian dollar’s performance against the crosses. That European vacation is suddenly starting to look mighty expensive.”