Stimulus hopes push Canada dollar to six-week high

Tue Jul 3, 2012 4:26pm EDT
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By Jennifer Kwan

TORONTO (Reuters) - Canada's dollar touched a six-week high against the U.S. currency on Tuesday, boosted by a rally in oil prices and growing expectations central banks outside of Canada will take more action to prop up the world economy.

The worsening deceleration in global manufacturing activity around the world - highlighting the drag on global growth from the euro zone debt crisis - has contributed to the view that central banks, including the U.S. Federal Reserve, will have to respond.

The belief that the Fed will deliver a third round of quantitative easing, or buying assets with freshly created money, gained momentum on Monday, when data showed the giant U.S. manufacturing sector contracted for the first time in nearly three years in June.

"People are expecting more in the way of QE3 now, potentially as soon as August, and that's one of the factors we think that is preventing more of an erosion of risk appetite," said Mark Chandler, head of Canadian fixed income and currency strategy at RBC Capital Markets.

"If they do go ahead and provide relief on that front, that makes for a better sort of longer-run outlook in terms of the (Canadian) currency and maybe underpins some commodity prices as well."

The Canadian dollar typically strengthens when commodity prices rise and the global growth outlook improves because the country is a major exporter of natural resources.

The Canadian currency closed C$1.0125 versus the U.S. dollar, or 98.77 U.S. cents, after earlier embracing a high of C$1.0121, or 98.80 U.S. cents, its loftiest level since May. 17.

On Friday, the North American session closed at C$1.0181 to the greenback, or 98.22 U.S. cents. Canadian stock and bond markets were closed on Monday for the Canada Day long weekend, as were domestic trading desks at Canadian banks.   Continued...

Images of the front and the back of the new Canadian 50 dollar bill, made of polymer, are seen on display before a news conference in Quebec City, March 26, 2012. REUTERS/Mathieu Belanger