Uncertain rate outlook takes toll on Canadian dollar

Tue Jun 1, 2010 5:12pm EDT
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By Ka Yan Ng

TORONTO (Reuters) - The Canadian dollar fell against the U.S. dollar on Tuesday, hit by global economic fears and the failure of the Bank of Canada to provide a clear signal that more interest rate increases were in the works after it raised its key rate by a quarter point.

The Bank of Canada became on Tuesday the first Group of Seven central bank to raise interest rates since the financial crisis began, pulling up its benchmark overnight rate to 0.50 percent, a move highly anticipated by the market.

But the central bank gave no indication that more hikes were on the way, causing the Canadian dollar to slump.

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

The Canadian dollar finished at C$1.0540 to the U.S. dollar, or 94.88 U.S. cents, down from Monday's close of C$1.0435 to the U.S. dollar, or 95.83 U.S. cents.

"The currency was priced for a hike, so the market wasn't disappointed from that perspective. Quite simply it was the accompanying guidance that was somewhat more dovish than expected," said Jack Spitz, managing director of foreign exchange at National Bank Financial.

"Much of the volatility in the Canadian dollar has come on the back of global factors again."

Global risk sentiment was hit by a warning from the European Central Bank on European Union public finances, which overcame support provided by better-than-expected U.S. April construction and May manufacturing data.   Continued...