Canada dollar slumps on BoC rate cut, bonds mixed

Tue Mar 4, 2008 5:07pm EST
 
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By John McCrank

TORONTO (Reuters) - The Canadian dollar tumbled lower against the U.S. dollar on Tuesday, after the Bank of Canada slashed its key interest rate and signaled more easing down the road.

Domestic bond prices rallied on the short end of the curve given the bank's dovish tone.

The Canadian dollar closed at US$1.0049, valuing a U.S. dollar at 99.51 Canadian cents, down from US$1.0118, valuing a U.S. dollar at 98.83 Canadian cents, at Monday's close.

It was the commodity-linked currency's third straight losing session, handing back most of the gains it made last week when it rallied with rising oil, gold, wheat, and base metal prices.

The Bank of Canada cut its key rate by 50 basis points to 3.50 percent, the biggest cut since 2001. But that was not a surprise, as most primary dealers were expecting the aggressive move, according to a Reuters poll taken on Friday.

"It was maybe not so much the decision to cut 50, but the tone of the statement that sounded quite dovish and that more cuts were certainly on the horizon," said Camilla Sutton, currency strategist at Scotia Capital.

The statement accompanying the announcement emphasized the downside risks to Canada's economy due to the U.S. economic downturn, which it said was likely to be more prolonged than the central bank had projected in January.

As in January, the bank said further monetary stimulus is likely to be required, but this time, the bank left out any reference to the economy picking up in the later half of the year.   Continued...