Canadian dollar falls on rate-cut expectations

Mon Apr 21, 2008 4:47pm EDT
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By Frank Pingue

TORONTO (Reuters) - The Canadian dollar closed lower versus the U.S. dollar on Monday as the likelihood of a Bank of Canada rate cut and a dovish bank statement more than offset the benefit of record high oil prices.

Bond prices finished higher across the curve as disappointing results from Bank of America Corp triggered a rally, and the rate-cut expectations convinced dealers to hang on to more secure assets such as government debt.

The Canadian dollar closed at C$1.0060 to the U.S. dollar, or 99.40 U.S. cents, down from C$1.0049 to the U.S. dollar, or 99.51 U.S. cents, at Friday's close.

A jump in crude oil prices to a record high above $117 a barrel helped the Canadian currency shoot above parity versus the greenback early in the day. It hit a session high of US$1.0002, valuing a U.S. dollar at 99.98 Canadian cents.

But it pulled back on expectations that the Bank of Canada will cut its key overnight rate by 50 basis points to 3.00 percent on Tuesday and leave the door open to another cut when it sets interest rates in June.

"You've got the backdrop of high oil prices and commodities are doing well, which should be Canadian-dollar positive," said David Watt, senior currency strategist at RBC Capital Markets.

"But you also have the Bank of Canada, which has expressed concern about the U.S. slowdown impact on the Canadian economy and tight finance conditions, and they are going to be cutting interest rates and probably leaving the door open to more."

Since slashing rates by a half-percentage point in March, the Bank of Canada has remained downbeat, but has also shied away from offering the market any hint on how big its next interest rate cut will be.   Continued...