August 19, 2008 / 9:14 PM / 9 years ago

Canadian dollar rises as greenback slumps

TORONTO (Reuters) - The Canadian dollar rose against the U.S. dollar on Tuesday as the greenback weakened due to market doubts that the U.S. Federal Reserve would be able to raise interest rates to control inflation because higher rates might amplify the country’s economic woes.

Canadian bond prices fell on firm Canadian wholesale trade data and a higher than expected U.S. inflation report.

The Canadian dollar closed at C$1.0610 to the U.S. dollar, or 94.25 U.S. cents, up from C$1.0643 to the U.S. dollar, or 93.96 U.S. cents, at Monday’s close.

The currency was initially lower as the U.S. dollar gained strength across the board after a report early in the day showed that U.S. inflation, in the form of producer prices, had risen to a 27-year high according to the year-over-year headline figure.

But the greenback’s strength faded as uncertainty grew about whether the U.S. Federal Reserve would consider raising interest rates to control inflation at a time when the U.S. economy still appears to be in bad shape.

“Those real hawks out there are sort of interpreting it as the Fed must raise rates towards the end of the year,” said Gareth Sylvester, senior currency strategist at HIFX in San Francisco.

“The doves are a bit more on the fence, thinking that the last thing we want to see are sharp contractions in growth, or a succinct period of slowdown with higher levels of inflation and what that would mean for the U.S. economy.”

U.S. economic fears were stoked by continued fallout in the country’s credit sector and more soft data from the housing sector.

At the same time the U.S. data was released, a Canadian report showed that a surge in auto sales helped Canadian wholesale trade in June rise by its largest margin since February, and ahead of market expectations.

“The wholesale sector is often somewhat overlooked in Canada, but it represents a reasonably important 5 percent of the Canadian economy, and it tends to punch above its weight in terms of its relevance for GDP forecasting,” said Eric Lascelles, chief economics and rates specialist at TD Securities, in a note.

The next major Canadian data will be June’s retail sales report on Wednesday.

Retail sales are expected to have risen 0.4 percent in June and 0.5 percent after stripping out auto sales.

The previous month, retail sales missed analysts’ expectations and contributed to a 0.7 percent slide in the Canadian dollar the day the data was released.

Canadian inflation numbers for July are due Thursday.

BOND PRICES FALL

Canadian bond prices initially rose on the back of credit worries coming out of the United States, but slipped steadily lower during the day.

“Gains couldn’t be held on to because of that combination of firmer (U.S.) inflation data and stronger wholesale trade in Canada,” said Mark Chandler, fixed income strategist at RBC Capital Markets.

The two-year bond fell 3 Canadian cents to C$101.74 to yield 2.741 percent. The 10-year bond fell 25 Canadian cents to C$105.62 to yield 3.563 percent.

The yield spread between the two-year and 10-year bond was 83.1 basis points, down from 85 basis points at the previous close.

The 30-year bond lost 72 Canadian cents to C$116.53 for a yield of 4.024 percent. In the United States, the 30-year treasury yielded 4.466 percent.

The three-month when-issued T-bill yielded 2.45 percent, down from 2.54 percent at the previous close.

Editing by Peter Galloway

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