July 17, 2012 / 8:49 PM / in 5 years

Canada dollar rallies on central bank's tightening bias

The new Canadian 20 dollar bill made of polymer is displayed at the Bank of Canada in Ottawa May 2, 2012.Chris Wattie

TORONTO (Reuters) - The Canadian dollar hit a near two-week high against its U.S. counterpart on Tuesday after the Bank of Canada maintained its rate-hiking bias even as other central banks are easing monetary policy to cope with damaging economic slowdowns.

The Bank of Canada left interest rates unchanged on Tuesday but made clear it was still weighing an eventual move higher, the same day Federal Reserve Chairman Ben Bernanke said the U.S. central bank stands ready to take further steps to stimulate the economy.

With growth easing around the globe, many other central banks have also eased policy recently, including the European Central Bank and the central banks of Britain and China.

"There is still some desire on the part of the Bank (of Canada) to take interest rates higher. They're really trying to send a message to the market that pricing in cuts is an unwise suggestion," said David Tulk, chief Canada macro strategist at TD Securities.

"At this point it really does suggest that the Bank is completely on hold, but there is still this bias to take interest rates higher."

The Canadian dollar ended the North American session at C$1.0126 versus the greenback, or 98.76 U.S. cents, firmer than Monday's finish at C$1.0147 against the U.S. dollar, or 98.55 U.S. cents. Earlier, the currency touched C$1.0120, or 98.81 U.S. cents, its strongest level against the U.S. dollar since July 5.

Higher interest rates tend to help a country's currency appreciate because they often attract international capital flows and vice versa.

"Obviously it expresses their confidence that in fact the Canadian economic recovery is relatively firmly rooted, and it does express the concern (that) behavior they're seeing in the marketplace is somewhat troubling to them," said Paul Taylor, investment strategist for BMO Harris Private Banking.

"I would argue that this is kind of moral suasion or a head fake on the part of the Bank of Canada to just at least provide the Canadian consumer with some caution as they go out and buy high-priced condos in Toronto or Vancouver ... I see it as simply jaw-boning and nothing more."

Unlike its struggling U.S. neighbor, Canada's housing market has boomed in recent years on the back of record-low borrowing costs.

Economists and policymakers alike have been concerned for some time about the risks of an asset bubble in the property market, though recent signs suggest activity is cooling.

Against a sagging euro, the Canadian dollar traded near a record peak hit in the previous session, touching an intraday high of C$1.2390, or 80.71 euro cents.

Canadian bond prices retreated across the curve on Tuesday, underperforming U.S. Treasuries at the interest-rate sensitive short end and outperforming at the long end.

The two-year government bond fell 3 Canadian cents to yield 0.973 percent, while the benchmark 10-year bond lost dropped 22 Canadian cents to yield at 1.642 percent.

Additional reporting by Julie Gordon and Jennifer Kwan; Editing by James Dalgleish

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