Canadian dollar ends higher in post-Fed rally

Wed Jun 25, 2008 5:25pm EDT
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By Frank Pingue

TORONTO (Reuters) - The Canadian dollar rebounded to close higher versus the U.S. dollar on Wednesday, with the greenback falling after a statement from the U.S. Federal Reserve convinced the market to pare back calls for aggressive U.S. rate hikes.

Canadian bond prices ended mostly flat across the curve and were unable to build significantly on gains recorded early this week as the Fed warned of elevated risks of inflation as it decided to leave its federal funds rate steady.

The Canadian dollar closed at C$1.0107 to the U.S. dollar, or 98.94 U.S. cents, up from C$1.0115 to the U.S. dollar, or 98.86 U.S. cents, at Tuesday's close.

The higher close for the Canadian currency, its third straight, came after the Fed's statement showed it was not concerned enough about inflation to trigger rate hikes, which ultimately undercut the U.S. dollar.

That opened the door for the Canadian currency to recoup earlier losses and rally to a session high of C$1.0088 to the U.S. dollar, or 99.13 U.S. cents, its highest level in three weeks, before giving back some of the gains.

"It's mainly because of the general U.S. dollar weakness following the Fed statement," said Matthew Strauss, senior currency strategist at RBC Capital Markets.

"It seems at least that the market is interpreting the statement as less hawkish than what they would have liked to see given the flurry of inflation concerns expressed by Fed officials during the last few weeks."

While the U.S. central bank expressed worries about upside risks to inflation, it also said it expects price pressures to moderate this year. Those comments were enough to convince the market to pare back expectations of interest rate increases.   Continued...