Canada dollar rallies to two-week high after U.S. fiscal deal

Wed Jan 2, 2013 5:04pm EST
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By Alastair Sharp

TORONTO (Reuters) - The Canadian dollar gained sharply against the U.S. dollar on Wednesday as investors cheered a political deal reached in the U.S. Congress that staved off measures that would likely have pushed Canada's main trading partner into recession.

The Canadian currency notched its biggest one-day gain since October 17 after U.S. lawmakers on Tuesday approved a plan to prevent huge tax increases and delay spending cuts that were due to kick in this month.

The deal also was followed by price jumps in gold, oil and stocks. <MLTS/GLOB><GOL/><O/R> But attention quickly turned to issues left unresolved by the fiscal deal, such as the need to increase the U.S. debt limit.

"They got past one hurdle but they're basically just halfway there," said Greg Moore, foreign exchange strategist at TD Securities. "While it does relieve a bit of short-term uncertainty ... there is still certainly potential for risk aversion to creep back in the coming months."

The Canadian dollar closed at C$0.9852 to the greenback, or $1.0150. It had ended 2012 near C$0.9925, or $1.0076, at 4 p.m. Eastern (2100 GMT) on Monday, according to Thomson Reuters data.

The currency reached C$0.9836, its strongest level against the greenback since December 18. It hit an almost nine-month high against the slumping Japanese yen, touching 88.62 yen at one point.

While a deal was widely expected by investors, most placed significant weight on a risk that no deal would be done in time.

"It wasn't perceived as a done deal that the issue would be resolved, although that was everyone's median case," said Adam Cole, global head of foreign exchange strategy at Royal Bank of Canada.   Continued...

A man holds the new Canadian 100 dollar bill made of polymer in Toronto November 14, 2011. REUTERS/Mark Blinch