December 13, 2011 / 9:48 PM / 6 years ago

Canadian dollar slumps after Fed disappoints

TORONTO (Reuters) - The Canadian dollar hit its weakest level against the U.S. dollar in nearly two weeks on Tuesday after the U.S. Federal Reserve stirred uncertainty by failing to signal policy easing despite warning that market turbulence poses threats to economic growth.

The currency dropped as low as C$1.0350 against its U.S. counterpart, or 96.62 U.S. cents, its weakest point since November 30, as the greenback donned its safe-haven sheen at the expense of the Canadian dollar and other riskier currencies.

The U.S. central bank characterized the U.S. economy as expanding moderately despite an apparent slowing in global growth, and said that while there had been some improvement in the job market, unemployment remained elevated and housing depressed.

"With most of the central banks turning towards the potential of adding more stimulus, the fact that the Fed is showing a lesser aptitude to step on the gas a little bit further ... disappointed markets," said David Watt, senior currency strategist at RBC Capital Markets.

"But I don't know really what people could reasonably have been expecting because the U.S. economy has generally been doing OK the last little while," he added, noting the Fed also let down those looking for more guidance on its evolving communications policy.

The Canadian dollar was already on weaker ground before the Fed statement as many investors were bracing for possible credit downgrades on several euro zone countries after European Union leaders failed last week to move decisively to tackle the region's debt crisis.

German Chancellor Angela Merkel added to the uncertainty when she rejected talk of raising the funding limit of a future bailout fund above 500 billion euros.

The Canadian dollar ended the North American session at C$1.0342 to the U.S. dollar, or 96.69 U.S. cents, down sharply from Monday's finish of C$1.0258 to the U.S. dollar, or 97.48 U.S. cents.

RBC sees support for the Canadian dollar around C$1.0364, followed by C$1.0482.

U.S. crude oil futures advanced more than 2 percent on Iran worries on Tuesday, their biggest one-day gain in almost four weeks, but that gave the commodity-linked Canadian currency only minor support.

"Oil hasn't really done a spectacular job of detailing where the Canadian dollar has been performing for a while," Watt said. "I think (the currency has) been more affected by general sentiment and like everything else, it depends on current sentiment with regards to the euro zone."

Firas Askari, head of foreign exchange trading at BMO Capital Markets, also said that macro factors were driving the currency more than any Canadian-specific factors. "Really, we're not in a play. The Canadian dollar is a bit of a sideshow."

Canadian government bond prices were mostly higher, with the two-year bond flat to yield 0.879 percent, while the 10-year bond added 33 Canadian cents to yield 1.975 percent.

Reporting By Claire Sibonney; Editing by Peter Galloway

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