CANADA FX DEBT-C$ weakens after Fed decision, bonds down

Wed Jun 24, 2009 3:26pm EDT
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* U.S. Fed holds policy steady, less worried on deflation

* C$ falls more than half a cent after Fed statement

* Bond prices fall, mirror losses in U.S. Treasuries (Updates figures, adds details)

TORONTO, June 24 (Reuters) - The Canadian dollar weakened on Wednesday after the U.S. Federal Reserve said it would keep rates unchanged and removed a reference about its concern inflation could run below desired levels.

Concluding a two-day meeting, the central bank said it had decided to hold overnight interest rates in a zero to 0.25 percent range -- the level reached in December -- and repeated that they would likely stay unusually low for some time. [ID:nTRT000372]

"They removed a key reference to the risk that inflation could persist for a time below rates that foster economic growth. They seem to have removed that so obviously they think that tail risk has lessened," said Michael Gregory, senior economist at BMO Capital Markets.

At 3 p.m. (1900 GMT), the Canadian dollar was at C$1.1519 to the U.S. dollar, or 86.81 U.S. cents, down from C$1.1500 to the U.S. dollar, or 86.96 U.S. cents, at Tuesday's close.

The U.S. dollar rose against major currencies, and the Canadian dollar was not excluded from the group. It fell more than half a U.S. cent to as low as C$1.1560 to the U.S. dollar, or 86.51 U.S. cents, shortly after the Fed's statement, before recovering to nearly unchanged on the day.

"There was that risk out there that the Fed could start to increase its monetization of government debt, which is never a good thing for a currency. That risk has lessened a little bit so it has provided support for the U.S. dollar at the expense of the Canadian dollar and other currencies," said Gregory.

The Fed repeated they will evaluate the timing and size of purchases of securities in light of the evolving outlook. For details, see [ID:nN24478373]

Canadian bond prices were lower across the curve, in line with their U.S. counterparts, following the Fed announcement. U.S. bond investors were disappointed that the central bank did not extend programs for buying longer-dated Treasuries and mortgage-backed securities. (Reporting by Ka Yan Ng; Editing by Jeffrey Hodgson)