Dollar rallies as BoC holds rates steady

Wed Sep 3, 2008 4:33pm EDT
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By John McCrank

TORONTO (Reuters) - The Canadian dollar reversed early losses to finish higher against the U.S. dollar on Wednesday, after the Bank of Canada held its key interest rate steady and gave no sign it would ease any time this year.

Shorter-dated bonds fell after the bank's announcement, as the market began pricing out an expected rate cut.

The Canadian dollar ended the North American session at C$1.0610 to the U.S. dollar, or 94.25 U.S. cents, up from C$1.0686 to the U.S. dollar, or 93.58 U.S. cents, at Tuesday's close.

The currency fell as low as C$1.0777 to the U.S. dollar, or 92.79 U.S. cents, early in the session, but surged higher after the central bank left its key rate steady at 3 percent and delivered a statement that lessened the odds for a rate cut at its next decision.

"The bank firmly reiterated its neutral stance," said Matthew Strauss, senior currency strategist at RBC Capital Markets. "So the market had to price out the possibility of a cut before the year and consequently we had that very strong rally in the Canadian dollar."

Most Canadian primary securities dealers did not think the bank would alter its key lending rate, but expected it to signal a bias towards easing.

Instead, the bank said the current level of the target for the overnight rate "remains appropriately accommodative."

The bank has lowered the overnight rate by 150 basis points since late last year in an attempt to spur growth in light of the U.S. economic slowdown.   Continued...