BoC's rate hike signal pulls Canada dollar above parity

Tue Apr 20, 2010 4:53pm EDT
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By Jennifer Kwan

TORONTO (Reuters) - Canada's dollar punched through parity with the U.S. currency on Tuesday after the Bank of Canada abandoned its conditional commitment to keep rates steady until the end of June.

The central bank became the first in the Group of Seven countries to hint it may raise interest rates, possibly as early as June 1, as the economy heals after recession. For now, the bank kept its key rate at its current ultra-low 0.25 percent level.

Currencies usually strengthen as interest rates rise as higher rates attract capital flows.

The bank has kept the overnight rate at the current historic low since April 2009. Until Tuesday it had pledged to hold it at that level until the end of June unless inflation strays off the bank's desired path.

The currency rallied to a high of C$0.9970 to the U.S. dollar, or $1.0030, as the market interpreted the dropped commitment as a signal the central bank is now more likely to hike rates in June than in July, as most in the market had previously forecast.

"They have definitely left their options wide open and the market is responding appropriately," said Doug Porter, deputy chief economist at BMO Capital Markets.

The Canadian dollar finished at C$0.9988 to the U.S. dollar, or $1.0012, its highest close since late May 2008. It also ended higher for the first time in four sessions, and was up from Monday's close of C$1.0148 to the U.S. dollar, or 98.54 U.S. cents.

The Canadian currency was last at one-for-one footing with the greenback on April 15.   Continued...