January 26, 2012 / 3:38 PM / 5 years ago

Canadian dollar strengthens on Fed, but Europe weighs

4 Min Read

TORONTO (Reuters) - Canada's dollar hovered close to parity with its U.S. counterpart on Thursday after the U.S. Federal Reserve's plans to keep rates low until 2014 drove down the U.S. dollar, but gains were pared by a slide in the euro as Greek debt talks produced few results.

The Canadian currency reached its highest point in nearly three months during the day after the U.S. central bank said on Wednesday it would likely keep interest rates near zero until late 2014 and Fed Chairman Ben Bernanke opened the door to further stimulus measures.

U.S. jobless data on Thursday added to expectations the U.S. Federal Reserve will keep policy easy for a long time, as weekly claims rose to 377,000, above a consensus forecast for 370,000. Sentiment also sagged after U.S. home sales fell 2.2 percent in December.

But the rally ebbed as investors fully digested the Fed statement and a more cautious tone returned.

"The wind has come out of the sails a bit," said Rahim Madhavji, president of Knightsbridge Foreign Exchange. "For the most part, people have priced in this new move on interest rates and it will be back to seesawing between U.S. economic growth on one end and the issues in Europe on the other hand."

The Canadian dollar finished at C$1.0017, or 99.83 U.S. cents, after breaching parity with the greenback for the first time since November 1 early Thursday and rising as high as C$0.9981. On Wednesday, the currency finished at C$1.0035 to the U.S. dollar, or 99.65 U.S. cents.

The currency's rally spurred the Canadian corporate sector to buy the greenback and sell Canadian dollars, said C.J. Gavsie, managing director of foreign exchange sales at BMO Capital Markets.

A strong Canadian dollar generally makes Canadian exports less competitive.

The currency will likely trade around parity over the next week or two, meeting resistance near the 200-day moving average of C$0.9949, Gavsie said, adding that pressures from Europe may also halt its momentum.

"As we do see some concern over the rest of Europe, outside of the Greek story, some of the risk-off aspects will come back into play and we will see some U.S. dollar strength," he said.

Market focus stayed on the struggle to tame Greek debt. Talks on a debt swap deal with the country's private creditors resumed as the clock ticks down to a March deadline, when Greece faces major bond redemptions.

In response to the Fed's rate-freeze extension, BMO Capital Markets pushed back its forecast for the next Bank of Canada rate move by six months until late 2013.

Others forecasters said that because of Canada's stronger economic fundamentals, the Bank of Canada was unlikely to lower its rate from 1 percent to be more in line with near-zero U.S. rates. Higher rates tend to help currencies strengthen by attracting international capital flows.

"Our unemployment rate is 7.5 percent. If we measured it in U.S. terms it would be about 6.5 percent and that would be very close to where they (Fed) see the unemployment rate two years from now," said Mark Chandler, head of Canadian fixed income and currency strategy at Royal Bank of Canada.

Canadian government bond prices were mostly higher, with the two-year bond up two Canadian cents to yield 1.01 percent. The 10-year bond rose 22 Canadian cents to yield 2.019 percent.

Editing by Peter Galloway

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