June 25, 2008 / 12:29 PM / 9 years ago

Canadian dollar rises to three-week high before Fed

4 Min Read

TORONTO (Reuters) - The Canadian dollar rose to a three-week high against the U.S. dollar on Wednesday, as investors waited to see if the U.S. Federal Reserve would sound the hawkish tone, as many were expecting, when it announces its interest rate decision later in the day.

Domestic bond prices, with no Canadian data releases to influence direction, were mixed ahead of the U.S. Federal Open Market Committee decision.

At 9:56 a.m. (1356 GMT), the Canadian dollar was at C$1.0100 to the U.S. dollar, or 99 U.S. cents, up from C$1.0115 to the U.S. dollar, or 98.86 U.S. cents, at Tuesday's close.

The Fed ends its two-day policy meeting on Wednesday. With only a 10 percent chance of a rate hike priced into the futures market, much of the focus will be on the accompanying statement for clues to future moves.

While Fed Chairman Ben Bernanke has recently emphasized the need to control inflation expectations, data has suggested persistent U.S. economic weakness, perhaps limiting the Fed's hand in raising rates anytime soon.

"Bernanke-speak always seems to be about inflation, inflation ,inflation -- but we've certainly seen a lot of pretty wobbly data coming out of the U.S., so I think there's a very difficult decision between worries about inflation expectations and the fact that the economy is still stumbling quite dramatically," said Steve Butler, senior currency strategist at Scotia Capital

"If the statement comes out and is not as hawkish as people expect in terms of taking a tough line on inflation, then I certainly think a lot of the future rate hike expectations in the futures market will have to be priced out," he said.

That could allow for some Canadian dollar strength, especially coming on the heels of the latest Bank of Canada interest rate announcement, which put a slight bid into the currency.

Earlier in the month, the bank surprised the market by leaving rates steady, at 3.00 percent, stymieing the nearly unanimous call for a 25 basis point cut by analysts and economists.

The Canadian central bank, which is expected to remain on hold at its next rate announcement on July 15, joined the chorus of most other major central banks, citing the risk of rising inflation as the reason behind its decision.

Bond Prices Mixed

Canadian bond prices were mixed as investors positioned themselves ahead of the Fed decision, said Eric Lascelles, chief economics and rates specialist at TD Securities.

The overnight Canadian Libor rate LIBOR01 was 3.0000 percent, down from 3.0017 percent on Tuesday.

Tuesday's CORRA rate CORRA= was 2.9839 percent, down from 2.9871 on Monday. The Bank of Canada publishes the previous day's rate around 9 a.m. daily.

The two-year bond fell 4 Canadian cents to C$100.90 to yield 3.226 percent. The 10-year bond dipped 7 Canadian cents to C$102.03 to yield 3.730 percent.

The yield spread between the two-year and 10-year bond was 46.4 basis points, down from 47.8 at the previous close.

The 30-year bond added 16 Canadian cents to C$116.04 for a yield of 4.053 percent. In the United States, the 30-year Treasury yielded 4.667 percent.

The three-month when-issued T-bill yielded 2.71 percent, down from 2.72 percent at the previous close.

Editing by Frank McGurty

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