July 31, 2012 / 12:22 PM / in 5 years

Canadian dollar falls from near-parity to U.S.$ after GDP

TORONTO (Reuters) - Canada’s dollar touched a session low against its U.S. counterpart on Tuesday, retreating from an 11-week high in striking distance of parity after domestic growth data showed the economy grew by less than expected.

Canada’s economy grew by 0.1 percent in May from April as weak manufacturing and construction activity partially offset strength in natural resources and some services industries.

The Canadian currency fell as low as C$1.0044 versus the greenback, or 99.56 U.S. cents, from about C$1.0029 just before the data’s release.

Analysts in a Reuters poll had forecast, on average, 0.2 percent growth in gross domestic product in May, following an expansion of 0.3 percent in April.

Still, the data was not seen having a big impact on the Bank of Canada, which is expected to keep interest rates on hold until the third quarter of next year. <CA/POLL>

“Remember they were already calling for a fairly mediocre second quarter in their downgraded outlook,” said Avery Shenfeld, chief economist for CIBC World Markets.

“If anything they may be slightly on the high side of what looks reasonable. This won’t be far off their projection. It’s simply too slow to be thinking of raising interest rates any time soon.”

At 9:30 a.m. EDT (1330 GMT), the Canadian dollar stood at C$1.0035 versus the greenback, or 99.65 U.S. cents, softer than Monday’s North American session close at C$1.0018 against the greenback, or 99.82 U.S. cents.

Earlier on Tuesday, the Canadian currency touched C$1.0003, or 99.97 U.S. cents, its firmest level since mid-May.

The currency also softened as investors feared a recent rally built on hopes of new stimulus from central banks in the United States and Europe had been overdone.

Riskier assets have been boosted by mounting expectation that the European Central Bank will revive its bond buying program to help lower the borrowing costs of debt-stricken Spain and Italy, while the U.S. Federal Reserve has been under renewed pressure to support flagging growth.

Both central banks hold policy meetings this week.

Last week, ECB President Mario Draghi said the ECB was ready to do whatever it takes to preserve the euro.

“Draghi especially ... has put his personal credibility on the line which is something that’s extraordinarily rare in central banking,” said Adam Button, currency analyst at ForexLive in Montreal.

“The market is now alight with speculation about some of the fantastic things they might do and that goes for the Fed as well, to some lesser extent, so right now we’re going to witness the full power of central banking.”

Canadian bond prices climbed across the curve, tracking U.S. Treasuries on the way up. Canada’s two-year bond rose 3 Canadian cents to yield 1.078 percent, and the benchmark 10-year bond gained 19 Canadian cents to yield 1.680 percent.

Additional reporting by Claire Sibonney; Editing by James Dalgleish

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