Canadian dollar rises to three-week high before Fed

Wed Jun 25, 2008 10:29am EDT
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By John McCrank

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.   Continued...