January 25, 2012 / 10:03 PM / 6 years ago

Canadian dollar hits near three-month high after Fed rate news

TORONTO (Reuters) - The Canadian dollar took a run at parity with its U.S. counterpart on Wednesday after the U.S. Federal Reserve announced it will keep U.S. interest rates unchanged until late 2014 to support the economic recovery.

In an unprecedented step toward greater transparency, the U.S. central bank also announced it would also adopt an inflation target of 2 percent.

The move by the Fed weakened the greenback against most global currencies as the underlying tone was one of doubt in the strength of the U.S. economy.

“Given the recent run of U.S. economic data, (the Fed statement) suggests that they don’t believe the U.S. is on the cusp of a sustained recovery,” said David Watt, senior currency strategist at Royal Bank of Canada.

The Fed announcement propelled the Canadian dollar to reverse early losses and close at C$1.0035 to the U.S. dollar, or 99.65 U.S. cents, up from Tuesday’s close at C$1.0099 to the U.S. dollar, or 99.02 U.S. cents.

The currency at one point touched C$1.0028, a level not reached since November 1.

“It certainly opens up the move towards parity and potentially to the 200-day moving average which is looming at C$99.46 ($1.0054),” said Watt.

The currency’s rise offset lingering doubts over Europe’s debt crisis after a Greece deal with its creditors remained unresolved and pressure mounted for the European Central Bank to write down its holdings of Greek debt.

On Wednesday, German Chancellor Angela Merkel deflected pressure by the International Monetary Fund to increase the euro zone’s rescue fund to 1 trillion euros.

Watt noted the Fed decision was an attempt to offset the negative European forces that have buffeted the U.S. and global economies.

“They’re trying to insulate the global economy and individual economies from potential turmoil should something untoward happen in the euro zone,” said Watt.

Canadian government bond prices were mostly higher, with the two-year bond up 5 Canadian cents to yield 1.023 percent. The 10-year bond rose 34 Canadian cents to yield 2.048 percent.

Editing by Jeffrey Hodgson

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