Canadian dollar rallies on BoC rate announcement

Wed Sep 3, 2008 10:34am EDT
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By Frank Pingue

TORONTO (Reuters) - The Canadian dollar shot higher versus the U.S. dollar on Wednesday and recouped all its early losses as the Bank of Canada held its key interest rate steady and gave no timing for when it might cut rates again.

The central bank's decision not to offer any signal for future interest rate cuts also stripped shorter-dated bonds of gains made earlier in the session.

At 10:05 a.m. (1405 GMT), the Canadian unit was at C$1.0614 to the U.S. dollar, or 94.22 U.S. cents, up from C$1.0686 to the U.S. dollar, or 93.58 U.S. cents, at Tuesday's close.

The surge in the dollar, which at one point hit C$1.0578 to the U.S. dollar, or 94.54 U.S. cents, came after the central bank left its key rate steady at 3 percent and delivered a statement that lessened the odds for a rate cut in October.

Most Canadian primary securities dealers did not expect the bank to alter its key overnight rate, but many had thought the accompanying statement would signal that rate cuts were on the horizon.

Instead, the bank said the current level of the target for the overnight rate remains appropriately accommodative, which leaves little chance of a rate cut for the rest of 2008.

"There was a wide spectrum of views on what the bank would do and say today and I think this came in near the least dovish end of the spectrum for the market," said Doug Porter, deputy chief economist at BMO Capital Markets.

"That hit the short end of the bond market and put support into the Canadian dollar."   Continued...

<p>A Canadian one dollar coin, also know as a loonie, is shown in Montreal in this April 28, 2006 file photo. REUTERS/Shaun Best</p>