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

Wed Jun 24, 2009 4:42pm EDT
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* C$ closes lower at 86.77 U.S. cents

* U.S. Fed holds policy steady, less worried on deflation

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

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

Concluding a two-day meeting, the U.S. 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 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.

The Canadian dollar finished at C$1.1525 to the U.S. dollar, or 86.77 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, including the Canadian dollar. 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.

"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.   Continued...