November 3, 2011 / 1:44 PM / 6 years ago

Loonie firmer after surprise ECB rate cut

TORONTO (Reuters) - The Canadian dollar strengthened to a session high against its U.S. counterpart on Thursday after the European Central Bank announced a surprise cut to interest rates, adding to market volatility as Greece's role in the euro zone was questioned.

Global stock markets rose, the euro turned higher and government debt fell to session lows after the unexpected quarter-point cut by the ECB, a move that adds to stimulus measures elsewhere and buoyed hopes for an economic recovery.

"Risk proxies are taking well to the ECB decision to cut interest rates, which caught everybody off guard," said David Watt, senior currency strategist at Royal Bank of Canada.

"It looks like we're got policy stimulus coming from the U.S., policy stimulus coming from Japan to the extent that they can, policy stimulus from the UK and policy stimulus from the ECB, which begins to ease some of the cyclical concerns as we head toward year-end."

The Canadian dollar spiked to a session high C$1.0055 to the U.S. dollar, or 99.45 U.S. cents, shortly after the rate cut, pushing through the 50-day moving average, before settling back somewhat.

At 9:23 a.m. (1323 GMT), the Canadian dollar stood at C$1.0096 to the U.S. dollar, or 99.05 U.S. cents, still well above Wednesday's North American session close at C$1.0136 to the U.S. dollar, or 98.66 U.S. cents.

Watt said the currency could test parity again, depending on how much stocks rally on the rate cut, but that remaining European uncertainty and the chaos of Greece's plan for the bailout package would likely limit gains.

"The 100-day moving average is C$0.9892, that's probably too far to carry that far. I think the bulk of the impact from the ECB is probably built in by now," Watt said.

A Reuters poll released on Thursday showed the Canadian dollar is expected to hold steady just below parity in the next few months before regaining equal status in 6 months and edging higher than the greenback a year from now.

A poll of 49 global foreign exchange strategists showed slightly more buoyant forecasts for the Canadian currency in the near term than in a similar poll a month ago.

Developments in Greece remained in focus as chaos over Greece's role in the euro zone continued.

Speculation that Prime Minister George Papandreou would resign was widespread, a move that would mean a new government and a reversal of plans for a plebiscite that could lead to a disorderly default by Greece on its bonds.

The threat of a Greek default and exit from the euro hung over a meeting of G20 leaders after France and Germany made it clear that Athens must decide urgently whether it wants to stay in the 12-year-old currency bloc.

Canadian government bond prices were lower across the curve. The two-year bond fell 10 Canadian cents to yield 1.018 percent, while the 10-year bond dropped 42 Canadian cents to yield 2.218 percent.

Editing by Jeffrey Hodgson

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