Red-hot Canada dollar ends higher, off 3-mth high

Thu Feb 28, 2008 4:47pm EST
 
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 By Frank Pingue
 TORONTO, Feb 28 (Reuters) - The red-hot Canadian dollar
extended its run higher against the U.S. dollar on Thursday,
revisiting levels not seen since mid-November, as a backdrop of
lofty commodity prices offered support.
 Domestic bond prices ended higher across the curve as the
latest economic data from the United States raised fears about
a recession and supported the case for lower interest rates.
 The Canadian dollar closed at US$1.0241, valuing a U.S.
dollar at 97.65 Canadian cents, up from US$1.0196, valuing a
U.S. dollar at 98.07 Canadian cents, at Wednesday's close.
 After skidding for three straight weeks, the Canadian
currency has turned around and surged 3.7 percent versus its
U.S. counterpart this week.
 It hit US$1.0298, valuing a U.S. dollar at 97.11 Canadian
cents, in the first half of the North American session, which
marked its highest level since Nov. 19.
 The bulk of its gains have been pegged to high commodity
prices, namely a surge in oil prices to a record above $102 a
barrel. Canada is a major producer and exporter of oil, as well
as commodities such as gold.
 Also helping compound the dollar's gains has been a weaker
greenback given a run of weak data and widespread expectations
for the U.S. Federal Reserve to lower interest rates.
 "There seems to be real underlying strength in commodity
prices and I do believe this is more than just the flip side of
a weak U.S. dollar," said Doug Porter, deputy chief economist
at BMO Capital Markets.
 "The Canadian dollar has had an enormous run and it feels
like what we saw back in late October and early November."
 Last November the Canadian dollar shot to a modern-day high
of US$1.1039, valuing a U.S. dollar at 90.59 Canadian cents,
due to a slew of factors that included lofty commodity prices,
a weak U.S. dollar, upbeat domestic data and few expectations
for Bank of Canada rate cuts.
 Likely keeping the Canadian dollar from making a serious
run at its modern-day high is the lack of any merger-related
interest like the C$40 billion deal for Alcan Inc. that was
working its way through the system late last year.
 Another factor holding the Canadian dollar from taking off
is that the Bank of Canada is widely expected to cut its key
overnight rate on March 4.
 BONDS RALLY
 Canadian bond prices followed the bigger U.S. Treasury
market to a higher close, which has been the case for much of
the week given the lack of domestic data and scores of weak
data from the United States.
 Weak fourth-quarter figures on U.S. gross domestic product
and another report showing U.S. unemployment-benefit claims
jumped last week helped support a rally in the bond market.
 "Most of that strength is being driven by another round of
very sour U.S. data," said Porter. "But definitely the strength
in the Canadian dollar probably isn't hurting the cause."
 The faster the Canadian dollar rises the greater the
likelihood of more aggressive easing by the Bank of Canada.
 Canada's economic calendar, which has been relatively quiet
all week, picks up on Friday with the industrial product price
and raw materials price indexes for January.
 The two-year bond rose 18 Canadian cents to C$102.20 to
yield 2.944 percent. The 10-year bond gained 82 Canadian cents
to C$102.22 to yield 3.714 percent.
 The yield spread between the two- and 10-year bond was 77.0
basis points, up from 76.7 basis points at the previous close.
 The 30-year bond added C$1.51 to C$115.26 to yield 4.099
percent. In the United States, the 30-year treasury yielded
4.527 percent.
 The three-month when-issued T-bill yielded 3.18 percent,
down from 3.21 percent at the previous close.