C$ firms after Fed announcement, hits 7-month high

Wed Apr 25, 2012 2:39pm EDT
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By Jon Cook

TORONTO (Reuters) - Canada's dollar rose to a seven-month high against its U.S. counterpart on Wednesday as euro zone debt concerns eased and the U.S. Federal Reserve said it would keep interest rates on hold until at least late 2014, a week after the Bank of Canada signaled it may withdraw stimulus measures.

The Fed on Wednesday repeated its promise to leave interest rates on hold near zero and described the U.S. economy as expanding moderately. It said economic conditions "are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014." [ID:nL2E8FOJAC] Fed Chairman Ben Bernanke will speak at a news conference this afternoon.

The Fed decision contrasted sharply with last week's Bank of Canada announcement that surprised the market with its hawkish tone and its suggestion that it may need to start raising interest rates.

"Right now, Canada is looking like one of the rare countries where there's possible hikes in place," said Sebastien Lavoie, an economist at Laurentian Bank of Canada BLC Securities. "Whereas in other countries there will probably be no modification at all in the stance of monetary policy."

Higher interest rates or expectations of higher rates tend to help currencies strengthen by attracting international capital flows. The Canadian dollar would likely strengthen further against the greenback should Canada raise rates ahead of the Fed.

At 1:43 p.m. (1543 GMT), the Canadian dollar was at C$0.9836 against the U.S. dollar, or $1.0164, up from Tuesday's finish at C$0.9880 against the U.S. dollar, or $1.0121. It touched C$0.9823, its highest against the greenback since September 19.

On Wednesday, Bank of Canada Governor Mark Carney will address the Senate Standing Committee on Banking, a day after he told the House of Commons finance committee that the central bank might have to increase interest rates because of the stronger performance of the economy and firmer underlying inflation.

A recent Reuters survey of the country's primary dealers showed the median forecast for the timing of the next rate increase being pushed up to the first quarter of 2013. <CA/POLL>   Continued...