Loonie rises after Bank of Canada rate cut

Tue Jan 22, 2008 11:25am EST
Email This Article |
Share This Article
  • Facebook
  • LinkedIn
  • Twitter
| Print This Article | Single Page
[-] Text [+]

By Frank Pingue

TORONTO (Reuters) - The Canadian dollar rose off a four-month low versus the U.S. dollar on Tuesday as a surprise rate cut by the U.S. Federal Reserve and a smaller cut by the Bank of Canada put the interest-rate spread in Canada's favor.

Domestic bond prices handed back earlier gains and slipped into negative territory, due mainly to the Bank of Canada rate decision which didn't deliver the 50-basis-point cut that many in the market had anticipated.

At 10:50 a.m., the Canadian unit was at C$1.0243 to the U.S. dollar, or 97.63 U.S. cents, up from C$1.0329 to the U.S. dollar, or 96.81 U.S. cents at Monday's close.

The Canadian dollar rose to C$1.0250, or 97.56 U.S. cents, around 8:20 a.m. after the Fed slashed rates by 75 basis points to 3.50 percent ahead of its policy meeting next week. But it handed back the gains within 10 minutes.

Shortly after, the Bank of Canada cut its key lending rate by 25 basis points to 4.00 percent at its scheduled monetary policy announcement, sending the Canadian dollar back higher.

"The Fed's aggressively cutting interest rates and the Bank of Canada is modestly cutting interest rates, so now the positive rate spread story is there," said David Watt, senior currency strategist at RBC Capital Markets.

"But the reaction of the Canadian dollar over the next few days is going to depend on whether or not we get some stability and confidence returning to the market."

Heading into the North American session, the Canadian dollar had been under pressure, given concerns about a possible global economic slowdown and talk that the Bank of Canada might cut rates by a bigger-than-expected 50 basis points.   Continued...

<p>Newly pressed Canadian one dollar coins, also know as loonies, at the Royal Canadian Mint in Winnipeg on November 14, 2007. REUTERS/Fred Greenslade</p>