Dollar drops ahead of rate decision

Mon Jun 9, 2008 4:48pm EDT
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By Frank Pingue

TORONTO (Reuters) - The Canadian dollar ended lower versus the U.S. dollar on Monday as the market took profits before what is widely expected to an interest rate cut by the Bank of Canada on Tuesday.

Canadian bond prices were knocked lower across the curve as expectations for more rate hikes in Europe weighed on sentiment in Canada and curbed the appetite for secure assets.

The Canadian dollar closed at C$1.0216 to the U.S. dollar, or 97.89 U.S. cents, down from C$1.0193 to the U.S. dollar, or 98.11 U.S. cents, at Friday's close.

The Bank of Canada will announce an interest-rate decision on Tuesday, and a recent Reuters poll showed all 12 Canadian primary dealers expect the bank to lower its key overnight rate by 25 basis points to 2.75 percent.

Focus will be on the bank's accompanying statement to see if it offers any hint on where its key rate is headed since recent data have showed Canada's gross domestic product shrank unexpectedly in the first quarter.

"A lot of people are focused on tomorrow's Bank of Canada rate-setting meeting and just how the Bank of Canada is going to lay the groundwork for the future given some of the hawkish rhetoric coming out of a number of central banks," said David Watt, senior currency strategist at RBC Capital Markets.

"People are wondering whether the Bank of Canada is going to leave the door open to future rate cuts given the negative first-quarter GDP number we had."

The Bank of Canada has cut its key rate by 150 basis points since the start of December, but the Canada-U.S. interest-rate gap still favors the Canadian dollar and has helped keep it near par versus its U.S. counterpart.   Continued...