Loonie climbs on rate cuts

Tue Jan 22, 2008 5:41pm EST
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By John McCrank

TORONTO (Reuters) - The Canadian dollar rose against the U.S. dollar on Tuesday, after an emergency interest rate cut by the U.S. Federal Reserve, followed by a smaller cut by the Bank of Canada, put the interest rate spread in Canada's favor and eased fears about the U.S. economic slowdown.

Domestic bond prices fell after the Bank of Canada delivered a smaller cut than many expected and as investors looked towards the rallying Toronto Stock Exchange.

The Canadian unit closed at C$1.0281 to the U.S. dollar, or 97.27 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, which had fallen as low as C$1.0369 to the U.S. dollar, or 96.44 U.S. cents, climbed as high as C$1.0208 to the U.S. dollar, or 97.96 U.S. cents, after the central bank announcements.

The Fed started the ball rolling with a 75-basis-point emergency cut to the fed funds rate to 3.50 percent.

That sent the Canadian dollar lower as many analysts expected a similarly aggressive cut, of 50 basis points, by the Bank of Canada at its scheduled monetary policy announcement.

However, the Bank of Canada eased its key lending rate by just 25 basis points, to 4.00 percent, sending the currency higher on the rate differential.

Equity markets reacted favorably to the economic stimulus, with the Dow Jones Industrial average erasing much of its earlier losses, and the TSX soaring more than 500 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>