January 28, 2008 / 10:32 PM / 9 years ago

Loonie benefits from U.S. dollar's weakness

4 Min Read

TORONTO (Reuters) - The Canadian dollar firmed against the U.S. dollar on Monday, as anticipation of further interest rate cuts by the U.S. Federal Reserve lessened the greenback's appeal.

Domestic bond prices ended slightly higher, ahead of flurry of U.S. data that is expected to overshadow any Canadian numbers as the market frets over the possibility of a recession in the world's biggest economy.

The Canadian unit ended the session at C$1.0044 to the U.S. dollar, or 99.56 U.S. cents, up from C$1.0070 to the U.S. dollar, or 99.30 U.S. cents, at Friday's close.

The currency spent the session in a range of C$1.0088 to the U.S. dollar, or 99.13 U.S. cents, and C$1.0023 to the U.S. dollar, or 99.77 U.S. cents.

The Canadian dollar is likely to stay rangebound ahead of the Fed's interest rate announcement on Wednesday, which will likely lead to more U.S. dollar weakness, said Camilla Sutton, currency strategist at Scotia Capital.

The Fed has cut interest rates by 175 basis points since September, lessening the greenback's appeal, and more easing is expected in the near-term to boost economic growth.

Data showing that U.S. new home sales dropped to their lowest rate in nearly 13 years stoked U.S. recession fears and reinforced market expectations of a 50-point cut by the Fed after it wraps up its policy meeting on Wednesday.

That would put the fed funds rate at 3.00 percent, compared to the Bank of Canada's key lending rate of 4.00 percent.

Last Tuesday, the Fed surprised the markets by slashing its key lending rate by 75-basis-points in a rare inter-meeting move. Since then, the Canadian dollar has risen 2.8 percent.

Even if the Fed cuts by less that half-a-percentage point, the Canadian dollar should still see more strength, said Sutton.

"Regardless, the Fed is expected to cut more aggressively than any other central bank and I think the market is still in the process of pricing that in."

Bonds Rise

Canadian bond prices rose, but the gains were limited as investors held off on making any major moves ahead of Wednesday's Fed announcement and a flurry of U.S. data.

Besides the Fed, the main focus for analysts on both sides of the border will be U.S. gross domestic product for the fourth quarter on Wednesday and non-farm payrolls on Friday, both of which have the potential to change the momentum in the markets, said Carlos Leitao, chief economist at Laurentian Bank of Canada.

The key piece of Canadian economic data due this week is the November gross domestic product report on Thursday, but both Leitao and Sutton said it would likely be overlooked as investors look south for direction.

The two-year bond rose 5 Canadian cents to C$101.85 to yield 3.202 percent. The 10-year bond was up 12 Canadian cents at C$101.24 to yield 3.839 percent.

The yield spread between the two-year and 10-year bond was 63.7 basis points, up from 63.1 points at the previous close.

The 30-year bond gained 6 Canadian cents to C$114.47 to yield 4.143 percent. In the United States, the 30-year Treasury yielded 4.282 percent.

The three-month when-issued T-bill yielded 3.41 percent, up from 3.40 percent at the previous close. (Editing by Renato Andrade)

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