Canadian dollar climbs with oil prices, bonds rise

Tue Aug 26, 2008 5:09pm EDT
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By John McCrank

TORONTO (Reuters) - The Canadian dollar rose against the U.S. dollar on Tuesday as Hurricane Gustav's potential to disrupt production lifted oil prices, supporting the commodity-linked currency.

Domestic bond prices, with no Canadian data to key off, rose after speech by a deputy governor of the Bank of Canada, which some in the market saw pointing to interest rate cuts down the road.

The Canadian dollar closed at C$1.0484 to the U.S. dollar, or 95.38 U.S. cents, up from C$1.0509 to the U.S. dollar, or 95.16 U.S. cents, at Monday's close.

Early in the session, the currency fell to a low of C$1.0563, or 94.67 U.S. cents, as the price of U.S. crude oil weakened below $114 a barrel.

But oil moved back above $116 as Hurricane Gustav looked set to head into the Gulf of Mexico, home to a quarter of U.S. oil production. Most weather models showed Gustav entering the Gulf by early Sunday.

Oil is seen as important to Canada's terms of trade as Canada is the biggest supplier of oil to the United States, and its oil sands represent the biggest deposits of crude outside the Middle East.

Rising oil prices were credited with a big chunk of the Canadian dollar's nearly 60 percent rise between 2002 and 2008. Lately, however, the relationship has been less predictable, as many analysts believe much of the recent strength in oil has been driven by speculation.

"There may be a little more substance behind this rally, given Hurricane Gustav," Matthew Strauss, senior currency strategist at RBC Capital Markets, said.   Continued...