Canadian dollar rattled by talk of BOC rate cut

Mon Jun 2, 2008 4:38pm EDT
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By Frank Pingue

TORONTO (Reuters) - The Canadian dollar fell nearly 1 percent versus the U.S. dollar on Monday as talk of a Bank of Canada rate cut picked up steam following the unexpectedly weak gross domestic data released late last week.

Canadian bond prices, with no fresh economic data to spark a move, followed the bigger U.S. Treasury market higher across the curve as Standard & Poor's downgraded the ratings of three U.S. investment banks.

The Canadian dollar closed at C$1.0012 to the U.S. dollar, or 99.88 U.S. cents, down 0.8 percent from US$1.0070, valuing a U.S. dollar at 99.30 Canadian cents, at Friday's close.

During the session the Canadian dollar fell as low as C$1.0028 to the U.S. dollar, or 99.72 U.S. cents, its lowest level in just over two weeks and also its first stint below parity versus the greenback since May 16.

The drag on the Canadian dollar was traced back to Friday, when data showed the Canadian economy shrank unexpectedly in the first quarter, denying the currency a chance to extend a three-week streak of rises.

"It's a lingering impact of last week's Q1 GDP report," said Paul Ferley, assistant chief economist at Royal Bank of Canada. "That has reinforced expectations of interest rate cuts here in Canada as opposed to the U.S., where there seems to be dwindling expectations of near-term moves by the Fed."

Last week's gross domestic product data reignited talk of a 25-basis-point interest rate cut by the Bank of Canada, which will make its next scheduled interest rate announcement on June 10.

The Bank of Canada has lowered its key overnight rate 150 basis to 3.00 percent since December. The U.S. Federal Reserve has staged a much more aggressive rate-cutting campaign but is expected to stand pat for now.   Continued...