Canadian dollar powered higher by inflation data

Wed May 21, 2008 5:02pm EDT
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By John McCrank

TORONTO (Reuters) - The Canadian dollar rose 0.8 percent against the U.S. dollar on Wednesday after a report showed inflation was creeping back into Canada, prompting investors to bet the Bank of Canada's rate-easing cycle was nearing its end.

Domestic bond prices fell as aggressive interest rate cuts were priced out of the market.

The Canadian dollar closed at US$1.0162, valuing a U.S. dollar at 98.41 Canadian cents, up from US$1.0082, valuing a U.S. dollar at 99.18 Canadian cents, at Tuesday's close.

The currency hit its high of the day, of US$1.0184, at the beginning of the session after data showed inflation in Canada picked up in April for the first time in five months.

Surging gasoline prices fueled a spike in the annual inflation rate to 1.7 percent, which, while below the Bank of Canada's 2 percent target, was above the 1.4 percent the market had expected.

Canada has been largely immune to the inflation pressures felt by most other major economies due to the price-dampening strength of the Canadian dollar, which was up around 17.5 percent in 2007. That gave the Bank of Canada room to shave 150 basis point off its key lending rate, to 3.00 percent, to spur domestic growth in the face of the U.S. economic downturn.

But as inflation begins to trickle into the economy, some market players say the end of the interest rate easing cycle is upon us.

"Putting today's data together with the broader environment of rising commodity prices and global inflation fears amid a steady exchange rate, we have no doubt that the BoC will be wondering whether it's prudent to keep easing in the near term," David Wolf, chief Canadian economist at Merrill Lynch, said in a note.   Continued...