Dollar firm after CPI data, awaits Fed move

Tue Mar 18, 2008 8:49am EDT
 
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By Frank Pingue

TORONTO (Reuters) - The Canadian dollar rallied against the U.S. dollar on Tuesday after a domestic inflation report beat estimates, but gave up most of those gains ahead of an impending U.S. Federal Reserve interest rate decision.

Domestic bond prices were pinned lower across the curve as U.S. equity futures pointed to a higher open, lessening the demand for more secure assets like government debt.

At 8:30 a.m., the Canadian currency was at US$1.0048, valuing a U.S. dollar at 99.52 Canadian cents, up from US$1.0007, valuing a U.S. dollar at 99.93 Canadian cents, at Monday's close.

Domestic inflation data released earlier helped boost the currency to US$1.0109, valuing a U.S. dollar at 98.92 Canadian cents, but much of those gains evaporated within 15 minutes as investors turned their focus to earnings from U.S. investment banks and a rate decision from the Fed.

The data showed Canada's annual inflation rate eased in February, but core inflation, which excludes volatile items like gasoline and guides monetary policy, rose to 1.5 percent from 1.4 percent in January.

"We just have to wait and see what the Fed does today, but certainly the market is not reacting as you'd expect from these (inflation) numbers," said Steve Butler, director of foreign exchange trading at Scotia Capital.

"Everybody has got in the back of their minds the (Fed) decision later this afternoon, and there's so many different scenarios that we can think about so everybody is just going to have to wait and see."

The market is pricing in a cut of at least 100 basis points to the Fed's benchmark lending rate of 3 percent, and some investors expect an even bigger 125-basis-point cut, as the Fed attempts to rally a flagging U.S. economy.   Continued...

 
<p>A Canadian one dollar coin, also know as a loonie, is shown in Montreal, April 28, 2006. REUTERS/Shaun Best</p>