June 18, 2008 / 8:59 PM / 9 years ago

Dollar ends flat after touching 1-week high

5 Min Read

TORONTO (Reuters) - The Canadian dollar closed a touch lower against the U.S. dollar on Wednesday but only after it hit a one-week high as a rethink on U.S. interest rate hikes continued to weigh on the greenback.

Domestic bond prices rose across the curve and reclaimed another chunk of last week's steep losses as investors dumped more risky assets in favor of government debt following fresh bank sector worries.

The Canadian dollar closed at C$1.0181 to the U.S. dollar, or 98.22 U.S. cents, down from C$1.0171 to the U.S. dollar, or 98.32 U.S. cents, at Tuesday's close.

Midway through the second half of the session the Canadian dollar rallied to C$1.0167 to the U.S. dollar, or 98.36 U.S. cents, its highest level since April 11. It then tilted lower but remained in the range it has occupied much of the year.

Dampened talk of U.S. Federal Reserve rate hikes, due to newspaper articles earlier this week citing Fed officials who said the U.S. central bank was unlikely to raise rates in the next few months, continued to give the Canadian dollar legs to rally.

And since much of the greenback's strength early this month was a byproduct of expectations for higher U.S. interest rates, it may face pressure as rate-hike talk dominates the market.

"Those (rate hike) expectations are being tempered in the marketplace and we're seeing kind of a reassessment of just how aggressive the Fed can potentially be," said Gareth Sylvester, senior currency strategist at HIFX Plc in San Francisco.

"Certainly the marketplace is not expecting them to take a real radical stance and that's just translating into some mild U.S. dollar weakness which is allowing the Canadian dollar to firm up ever so slightly."

Domestic data that showed the composite leading indicator climbed 0.2 percent in May after coming in flat or negative for the previous three months, did not have any noticeable impact on the Canadian dollar given the more key events due Thursday.

Key events in Canada that will be watched closely by market participants are Thursday's May consumer price index data and Bank of Canada Governor Mark Carney's speech in Calgary.

Carney, who will be giving his first speech since the central bank unexpectedly left its key interest rate steady, will speak on "Capitalizing on the Commodity Boom: The Role of Monetary Policy" after markets close on Thursday.

Bond Prices Rise

Canadian bond prices followed the U.S. Treasury market to a higher close as a slide in U.S. stocks heightened demand for government debt and left any chance of a Federal Reserve rate hike this summer less likely.

Support for bond prices gained momentum after the newspaper reports cited Fed officials playing down rate-hike talk.

It picked up more steam on Wednesday as bank shares skidded because of weakness in the U.S. credit and lending system, which also lessened the chance of a Fed rate hike.

The Fed has slashed its key federal funds rate 325 basis points to 2.00 percent since last year and a growing number of market participants had been starting to consider how soon, rather than if, the Fed would start hiking rates.

"That was a pretty big shot across the bow from the Fed," said Eric Lascelles, chief economics and rates strategist at TD Securities. "The market's possibly got too much priced in on the hike side and it's taking a while for that to percolate through and that's kept the bid tone going."

But Lascelles said the rise in bond prices was contained, given a threat that the domestic CPI report could come in ahead of expectations for a core reading of 0.3 percent in May.

The two-year bond climbed 4 Canadian cents to C$100.93 to yield 3.255 percent. The 10-year bond gained 16 Canadian cents to C$101.38 to yield 3.816 percent.

The yield spread between the two-year and 10-year bond was 56.1 basis points, down from 56.2 at the previous close.

The 30-year bond rose 41 Canadian cents to C$114.04 for a yield of 4.161 percent. In the United States, the 30-year treasury yielded 4.716 percent.

The three-month when-issued T-bill yielded 2.67 percent, down from 2.70 percent at the previous close.

Editing by Rob Wilson

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