Dollar rises for second day on rates

Wed Jun 11, 2008 4:54pm EDT
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By Frank Pingue

TORONTO (Reuters) - The Canadian dollar rose for a second straight session versus the U.S. dollar on Wednesday as a surprise decision by the Bank of Canada to leave interest rates steady continued to offer support.

A jump in oil prices of more than $5 a barrel also helped fuel the gain in the commodity-linked Canadian dollar. Canada is a major oil exporter. The currency rose 0.2 percent on Wednesday.

The Canadian dollar closed at C$1.0200 to the U.S. dollar, or 98.04 U.S. cents, up from C$1.0224 to the U.S. dollar, or 97.81 U.S. cents, at Tuesday's close.

Last week the Canadian dollar fell 2.6 percent as traders considered a Bank of Canada rate cut to be a sure bet. But when the bank went against expectations on Tuesday and said it would leave its key rate steady at 3.00 percent, the Canadian dollar staged a rebound that continued on Wednesday.

"I think the Canadian dollar was pressured lower earlier on by expectations that the Bank of Canada might opt for an easier policy stance compared to the United States," said Paul Ferley, assistant chief economist at Royal Bank of Canada.

"But with the announcement yesterday that line of thinking proved to be incorrect, and because of that we are continuing to see the Canadian currency correct."

With the Bank of Canada's key overnight rate steady at 3.00 percent, the Canada-U.S. interest rate gap continues to favor the Canadian currency since the U.S. Federal Reserve's federal funds rate is 2.00 percent.

The second day of gains for the Canadian dollar came after a slide to C$1.0246, or 97.60 U.S. cents, during the overnight session. But a sliding greenback and higher oil prices opened the door for the Canadian dollar to bounce back.   Continued...