Canadian dollar rattled by Bank of Canada rate cut

Tue Dec 4, 2007 5:14pm EST
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By Frank Pingue

TORONTO (Reuters) - The Canadian dollar finished at its lowest level in 11 weeks versus the greenback on Tuesday as the Bank of Canada went against market expectations and cut its key interest rate for the first time since early 2004.

Canadian bond prices closed higher across the short end of the curve, but the bank's lack of signals regarding what it will do when it sets policy in January ate away at the gains as the session wore on.

The Canadian dollar closed at 98.77 U.S. cents, valuing each U.S. dollar at C$1.0124, down from 99.98 U.S. cents, or C$1.0002, at Monday's North American close.

The Canadian dollar hit a session low of 98.49 U.S. cents, or C$1.0153, right after the Bank of Canada lowered its overnight rate to 4.25 percent from 4.50 percent.

In the statement that accompanied its decision, the bank delivered a more dovish tone than it did when it left interest rates unchanged in October.

"Not only did they surprise the market but they also included a statement whose tone was somewhat dovish," said David Powell, currency analyst at IDEAglobal in New York.

"In other words, they left the door open for further cuts in the first quarter of next year and likely into the second quarter as well."

The Bank of Canada said it expects the U.S. subprime mortgage market and financial market fallout to drag on longer than expected.   Continued...

<p>Newly pressed Canadian one dollar coins, also know as loonies, at the Royal Canadian Mint in Winnipeg November 14, 2007. REUTERS/Fred Greenslade</p>