Canadian dollar rises as greenback slumps

Tue Aug 19, 2008 5:12pm EDT
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By John McCrank

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.   Continued...