C$ rises on BoC policy news, but Spain trims gain

Tue Jun 5, 2012 5:11pm EDT
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By Jon Cook

TORONTO (Reuters) - The Canadian dollar firmed against its U.S. counterpart on Tuesday, boosted by signals the Bank of Canada is still more inclined to raise rates than cut them, but the rise was limited by concerns about Spain's debt-laden banks.

The language of the Bank of Canada's scheduled interest rate announcement on Tuesday had a less hawkish tone than its policy statement in April. The central bank acknowledge deteriorating economic conditions abroad, as it kept its key policy rate at 1 percent.

However, the statement was still more hawkish than many market players had expected, as the central bank did not remove the possibility of a rate increase further down the road should the Canadian economy maintain its momentum.

"The statement did seem to point towards that the next move here, in their mind, will be a rate hike," said Shane Enright, executive director, foreign exchange sales at CIBC World Markets.

Repeating language used in April, the central bank said "some modest withdrawal of the present considerable monetary policy stimulus may become appropriate," though it qualified this by saying it depended on continued economic growth.

The Canadian currency strengthened near its overnight high of C$1.0361 against the U.S. dollar, or 96.52 U.S. cents, before falling back later in the session. It was around C$1.04 prior to the Bank of Canada announcement.

The prospect of higher interest rates tends to help currencies strengthen by attracting international capital flows. The Bank of Canada's main policy rate has been at 1 percent since September 2010.

The Canadian dollar, which outperformed most major currencies, finished at C$1.0380 against the U.S. dollar, or 96.34 U.S. cents. It was up slightly from Monday's close at C$1.0397 versus the greenback, or 96.18 U.S. cents.   Continued...