Canada dollar flags as Bernanke boosts greenback

Tue Jun 3, 2008 5:25pm EDT
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By Frank Pingue

TORONTO (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.   Continued...