Canada dollar flags as Bernanke boosts greenback

Tue Jun 3, 2008 5:22pm EDT
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 * Canadian dollar weakens against rallying U.S. dollar
 * Its decline reaches 1.5 percent over two sessions
 * Bonds rebound on U.S. avian bird flu scare
 By Frank Pingue
 TORONTO, June 3 (Reuters) - The Canadian dollar fell nearly
1 percent on Tuesday against a U.S. dollar that rallied after
comments from the head of the Federal Reserve that bolstered
the view that the Fed may raise U.S. interest rates this year.
 Domestic bond prices rebounded from losses suffered early
in the session and closed mostly higher across the curve as
bird flu news out of the United States and financial jitters
sparked demand for more secure assets.
 The Canadian dollar closed at C$1.0086 to the U.S. dollar,
or 99.15 U.S. cents, down from C$1.0012 to the U.S. dollar, or
99.88 U.S. cents, at Monday's close.
 After snapping a three-week streak of gains last week, the
Canadian currency has pushed lower, including a 0.8 percent
decline on Monday and 0.7 percent drop on Tuesday.
 The latest decline was pegged to the U.S. dollar's
strength, rather than anything specific to Canada. Fed Chairman
Ben Bernanke, in an address to a conference in Barcelona,
warned about the inflationary impact of a weak currency,
suggesting the central bank may raise rates to support the
dollar and staunch any inflationary pressure.
 "There's one event that's pretty much driven the Canadian
dollar and that's the Bernanke comments," said Stewart Hall,
market strategist at HSBC Securities. "He certainly grabbed the
attention of currency markets and caused a fairly broad-based
(U.S.) dollar rally,"
 The Fed has slashed its benchmark overnight lending rate by
3.25 percentage points since mid-September. The Bank of Canada
has lowered its key rate 1.50 percentage points to 3.00 percent
since the start of December and is expected to cut another 25
basis points on June 10.
 Another drag on commodity-linked Canadian dollar were the
growing concerns about slowing global growth and how that could
weaken prices for the commodities that Canada exports. Oil
prices have steadily fallen from a record above $135 a barrel
reached last month.
 The Canadian dollar spent the North American session in a
range of US$1.0045, valuing a U.S. dollar at 99.55 Canadian
cents, and C$1.0097 to the U.S. dollar, or 99.04 U.S. cents,
which marked its lowest in nearly a month.
 Canadian bond prices recouped early losses thanks to an
avian bird flu scare at the second-largest U.S. chicken
producer, and a report that Lehman Brothers Holdings Inc had to
borrow directly from the Fed via the discount window.
 Tyson Foods Inc said it would have to get rid of about
15,000 chickens exposed to a mild strain of bird flu that had
no risk to human health. But the news sent a shiver through
financial markets and raised a bid for safe-haven government
 Lehman eventually denied that it has borrowed money from
the Fed recently and said it finished the second quarter well
above $40 billion in liquidity. Still, the speculation
rekindled memories of the collapse of Bear Stearns earlier this
 "The initial negative tone in in bond markets was on
Bernanke's comments that appear to suggest that the Fed was
through (cutting rates)," said Mark Chandler, fixed income
strategist at RBC Capital Markets.
 "But later on, concerns about the brokerage liquidity in
the U.S., and also warnings of bird flu in the U.S., really
dictated things."
 The move in bond prices was also held in check ahead of May
employment reports for Canada and the United States on Friday.
 The two-year bond rose 11 Canadian cents to C$101.76 to
yield 2.833 percent. The 10-year bond ended up 7 Canadian cents
at C$102.85 to yield 3.625 percent.
 The yield spread between the two-year and 10-year bond was
79.2 basis points, up from 73.8 at the previous close.
 The 30-year bond fell 12 Canadian cents to C$115.28 for a
yield of 4.095 percent. In the United States, the 30-year
treasury yielded 4.623 percent.
 The three-month when-issued T-bill yielded 2.58 percent,
down from 2.63 percent at the previous close.
 (Editing by Frank McGurty)