February 11, 2008 / 9:50 PM / 9 years ago

Dollar falls as rate cut comments linger

4 Min Read

TORONTO (Reuters) - The Canadian dollar ended lower against the U.S. dollar on Monday in a lackluster session in which investors reflected on weekend Bank of Canada comments that suggested more interest rate cuts are on the way.

Domestic bond prices held on to finish higher across the curve as concerns about a U.S. recession trumped a turnaround in North American equity markets.

The Canadian dollar closed at C$1.0015 to the U.S. dollar, or 99.85 U.S. cents, down from US$1.0002, which valued a U.S. dollar at 99.98 Canadian cents, at Friday's close.

Comments from Bank of Canada Governor Mark Carney over the weekend, which suggested more rate cuts were likely needed, were enough to weigh on the currency given the lack of any key domestic data to sway financial markets.

Carney said the timing and degree of any rate cuts will be determined at future fixed announcement dates, which leaves the door open for a bolder 50 basis point cut when the central bank next sets interest rates on March 4.

"I personally took the remarks to be mildly dovish," said Doug Porter, deputy chief economist at BMO Capital Markets. "And if you read between the lines you could see he was leaving the door slightly ajar to a more aggressive move."

The Canadian dollar, which spent the session wedged in a range of C$1.0035, or 99.65 U.S. cents, and US$1.0015, valuing a U.S. dollar at 99.85 Canadian cents, barely budged after news that the minority Conservative government will present its next federal budget on February 26.

If the budget is not passed, the government will fall and there will be a federal election. However, that is not expected to rattle the currency as polls suggest another minority government would likely be the result.

The Canadian dollar has been bounced around, given the benefit of a 1 percent Canada-U.S. interest rate gap and the drawback of commodity prices that have eased from record highs reached earlier this year.

The Canadian dollar tumbled 4.5 percent in the first three weeks of 2008, but has since clawed its way back and is roughly where it started, around parity with the greenback.

"The currency is still dealing with that duel impact of potentially weaker commodity prices and widening Canada-U.S. spreads," said Porter. "So far, those two forces have fought to a draw in 2008."

Bonds Finish Higher

Canadian bond prices managed to grind out a minor gain alongside a rally in the bigger U.S. Treasury market as dealers shrugged off a rebound in equity markets and focused more on nagging U.S. recession concerns.

"The market is still focused squarely on U.S. recession risks and what that might mean for a variety of debt markets," said Porter.

The latest piece of Canadian data showed the price of new homes rose by 0.1 percent in December from November, which was shy of estimates calling for a gain of 0.3 percent.

The two-year bond rose 3 Canadian cents to C$102.07 to yield 3.055 percent. The 10-year bond increased 24 Canadian cents to C$101.62 to yield 3.791 percent.

The yield spread between the two- and 10-year bond was 73.6 basis points, down from 74.6 at the previous close.

The 30-year bond rose 44 Canadian cents to C$114.02 to yield 4.166 percent. In the United States, the 30-year treasury yielded 4.403 percent.

The three-month when-issued T-bill yielded 3.25 percent, down from 3.28 percent at the previous close.

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