5 Min Read
* Canadian dollar rallies to highest level since Nov. 12
* Bulk of gains recorded after Fed slashes target rate
* Bond prices all end higher alongside U.S. market
By Frank Pingue
TORONTO, Dec 16 (Reuters) - The Canadian dollar closed at its highest level in 5 weeks against the U.S. dollar on Tuesday as a decision by the Federal Reserve to cut interest rates by more than expected rattled the greenback.
Domestic bond prices finished comfortably higher across the curve as unorthodox steps by the Fed to grapple with the credit crisis sparked talk that the Bank of Canada could adopt an even more aggressive tone than it already has.
The Canadian dollar closed at C$1.2018 to the U.S. dollar, or 83.21 U.S. cents, up 2.5 percent from C$1.2317 to the U.S. dollar, or 81.19 U.S. cents, at Monday's close.
The bulk of the currency's gain was recorded late in the session and after the Fed established a target range for federal funds of zero to 0.25 percent, down from its previous target of 1 percent.
The Fed also said it would employ "all available tools" to dispel a year-long recession, which sparked an intense selloff in the greenback and opened the door for a sudden surge by the Canadian dollar.
The currency rose as high as C$1.1985 to the U.S. dollar, or 83.44 U.S. cents, late in the session, which marked its highest level since Nov. 12.
"Generally the Fed was more aggressive than expected almost across the board, both in terms of the rate move and the very aggressive statement of potential further actions," said Doug Porter, deputy chief economist at BMO Capital Markets. "So we saw the U.S. dollar take it on the chin ... and this is by no means exclusive to the Canadian dollar."
The domestic currency, which rallied 1.6 percent last week, is up 4 percent this week and is on pace to record its first back-to-back winning weeks since Nov. 7.
Early in the session the Canadian dollar had drawn support from higher oil prices, which rallied on expectations that the Organization of the Petroleum Exporting Countries would agree to its biggest supply cut ever when the group meets in Algeria this week.
But oil prices turned around to settle 3 percent lower as nagging worries about shrinking global demand more than offset expectations that OPEC will agree to supply cuts.
The main piece of Canadian data for the day showed factory sales fell 0.5 percent in October from September, in line with expectations, but its impact on the currency was muted.
BOND PRICES SURGE AFTER FED
Canadian bond prices took their cue from the bigger U.S. Treasury market, which finished sharply higher as the Fed said it would keep its federal funds rate at "exceptionally low levels for some time." While prices jumped, yields on both sides of the border fell to record lows.
The aggressive stance from the Fed also seem to raise the possibility that the Bank of Canada, which cut its key overnight rate last week by 75 basis points to 1.25 percent, could maintain its aggressive position.
"I think it also raises the possibility of the Bank of Canada taking on a bit more of an aggressive stance looking forward as well," said Porter.
"Probably not to the same extent that we've seen from the Fed but it at least increases the chances that the Bank of Canada might do something broadly similar."
The next Canadian economic data due out will be the October wholesale trade report on Wednesday, followed by the October retail sales figures on Thursday and Friday's consumer prices report for November.
The two-year bond rose 32 Canadian cents to C$102.80 to yield 1.294 percent. The 10-year rallied C$1.00 to C$110.65 to yield 2.950 percent.
The yield spread between the two-year and 10-year bond was at 174 basis points, up from 161 basis points at the previous close.
The 30-year bond jumped C$1.55 to C$123.35 to yield 3.671 percent. In the United States, the 30-year treasury yielded 2.804 percent. (Editing by Rob Wilson)