Loonie firms after inflation data, Fed cut

Tue Mar 18, 2008 5:41pm EDT
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By John McCrank

TORONTO (Reuters) - The Canadian dollar strengthened against the greenback on Tuesday, after the U.S. Federal Reserve cut interest rates less than expected and a domestic inflation report was seen leaving the Bank of Canada room to cut its rates further.

Domestic bond prices ended lower across the curve after the Fed's 75 basis point rate cut, as investors softened expectations of how aggressive the U.S. central bank's easing campaign would be.

The Canadian dollar closed 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.

The currency hit its peak at the beginning of the session, touching US$1.0109, making a greenback worth 98.92 Canadian cents, after the domestic inflation report.

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

"It does remind you that, at some point, the pass-through of the rise of the Canadian dollar, which has been over for a while, will begin to fade away and maybe this is the beginning of that," said Don Drummond, chief economist at Toronto-Dominion Bank.

Inflation had been easing as the effects of the strong Canadian dollar, which rose 17.5 percent against the greenback last year, made imported goods cheaper.

Even with the rise, core inflation was well within the central bank's range of 1 to 3 percent and left the door open to more rates cuts, if needed, to deal with the effects of the economic slowdown south of the border.   Continued...

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