June 5, 2012 / 9:14 PM / in 5 years

C$ rises on BoC policy news, but Spain trims gain

TORONTO (Reuters) - The Canadian dollar firmed against its U.S. counterpart on Tuesday, boosted by signals the Bank of Canada is still more inclined to raise rates than cut them, but the rise was limited by concerns about Spain’s debt-laden banks.

The language of the Bank of Canada’s scheduled interest rate announcement on Tuesday had a less hawkish tone than its policy statement in April. The central bank acknowledge deteriorating economic conditions abroad, as it kept its key policy rate at 1 percent.

However, the statement was still more hawkish than many market players had expected, as the central bank did not remove the possibility of a rate increase further down the road should the Canadian economy maintain its momentum.

“The statement did seem to point towards that the next move here, in their mind, will be a rate hike,” said Shane Enright, executive director, foreign exchange sales at CIBC World Markets.

Repeating language used in April, the central bank said “some modest withdrawal of the present considerable monetary policy stimulus may become appropriate,” though it qualified this by saying it depended on continued economic growth.

The Canadian currency strengthened near its overnight high of C$1.0361 against the U.S. dollar, or 96.52 U.S. cents, before falling back later in the session. It was around C$1.04 prior to the Bank of Canada announcement.

The prospect of higher interest rates tends to help currencies strengthen by attracting international capital flows. The Bank of Canada’s main policy rate has been at 1 percent since September 2010.

The Canadian dollar, which outperformed most major currencies, finished at C$1.0380 against the U.S. dollar, or 96.34 U.S. cents. It was up slightly from Monday’s close at C$1.0397 versus the greenback, or 96.18 U.S. cents.

The boost from the Bank of Canada announcement was limited by fears about the state of Spain’s fragile banking sector.

The euro fell as Spain’s treasury minister said high borrowing costs were closing the country off to credit markets and investors received scant comfort from an emergency conference call of Group of Seven finance chiefs. <FRX/>

“The vulnerability of markets and the volatility predominately out of Europe will continue to weigh on a currency like Canada,” said Jack Spitz, managing director of foreign exchange at National Bank Financial. “I would expect dollar-Canada to trade more sideways.”

Enright said the currency would likely trade between C$1.0350 and C$1.0450 for the near term, pending signals of further stimulus measures from Wednesday’s European Central Bank policy meeting and U.S. Federal Reserve chairman Ben Bernanke’s testimony to the U.S. Congress on Thursday.

Further out from that, market watchers were looking ahead to Greek elections and a G20 meeting in Mexico, both on the weekend of June 17.

Canadian bond markets were mostly lower. Canada’s two-year bond fell 4 Canadian cents to yield 0.993 percent, while the benchmark 10-year bond dropped 57 cents to yield 1.737 percent.

Additional reporting by Andrea Hopkins; Editing by Jeffrey Hodgson

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