Canadian dollar clipped by stumbling economy

Thu Jul 31, 2008 5:18pm EDT
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By John McCrank

TORONTO (Reuters) - The Canadian dollar closed lower against the U.S. dollar for the sixth time in the past seven days on Thursday as a report showed Canada's economy unexpectedly shrank in May, dashing hopes the Bank of Canada will raise interest rates any time soon.

Canadian bond prices rose across the curve on the weak economic data, as well as some softer-than expected U.S. data.

The Canadian currency closed at C$1.0240 to the U.S. dollar, or 97.66 U.S. cents, down from C$1.0228 to the U.S. dollar, or 97.77 U.S. cents, at Wednesday's close.

The currency hit a low of C$1.0270 after a report from Statistics Canada showed the economy shrank by 0.1 percent in May from April, missing expectations of a 0.2 percent rise.

"The market was disappointed with the decline in May GDP," said Paul Ferley, assistant chief economist at RBC Capital Markets. "But it did follow a solid gain in April, four-tenths of a percent, and with that earlier increase it hopefully will return quarterly growth back to the positive column."

Canada's economy unexpectedly shrank in the first quarter for the first time in five years. Two back to back negative quarters would mean that Canada is technically in a recession. The negative print on the May GDP quashed any hopes of the Bank of Canada raising interest rates any time soon, despite higher inflation, analysts said.

Adding to the pressure on the currency was weak U.S. data that did not bode well for a Canadian economy that relies heavily on the United States as a market for the bulk of its exports.

A report from the United States showed the number of workers filing claims for new jobless benefits rose more than expected last week, while other data showed the U.S. economy grew slightly less than expected in the second quarter.   Continued...