Loonie rides oil price rally, bonds firm

Thu Feb 24, 2011 8:25am EST
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By Ka Yan Ng

TORONTO (Reuters) - Canada's dollar climbed against the U.S. currency on Thursday morning, approaching three year highs reached last week, as oil prices extended gains on turmoil in Libya.

Oil surged again on Thursday on concern unrest in Libya could spread to other major oil producers in the Middle East, including Saudi Arabia. Both Brent and U.S. crude futures jumped to multiyear highs, providing some support to Canada's commodity-linked currency.

Rising U.S. crude prices typically help the Canadian dollar as Canada is a net oil exporter. But strong oil prices have also fueled concerns that they could inspire inflation, which might choke the global economic recovery.

The Middle East tensions stoked further appreciation in crude oil prices and demand for safe haven currencies at the broad expense of the greenback.

"In other times, you've had a flight to safety bid to the U.S. dollar that may have counteracted some of the positive news on Canada but the U.S. dollar is struggling here," said Mark Chandler, head of Canadian fixed income and currency strategy at RBC Capital Markets.

"In the initial stages of the rally in oil prices, (the Canadian dollar) really didn't gain too much support. But it's getting more now. It's almost by default."

He said other commodity currencies such as the New Zealand and Australian dollars were under pressure from other sources this week, "so a combination of rising oil prices and no better alternatives around have helped Canada somewhat."

At 8:05 a.m., the Canadian dollar was at C$0.9840 to the U.S. dollar, or $1.0173, up from Wednesday's finish at C$0.9886 to the U.S. dollar, or $1.0115. It had reached as high as 0.9822 to the U.S. dollar, or $1.0181, not far from the March 2008 high reached last week at C$0.9816 to the U.S. dollar, or $1.0187. If broken, a run toward C$0.9800 may be in the cards, analysts say.   Continued...