August 2, 2012 / 12:47 PM / in 5 years

Canadian dollar pulls back from near parity with US$ after ECB

TORONTO (Reuters) - The Canadian dollar sank after soaring to near parity with the U.S. dollar on Thursday after European Central Bank President Mario Draghi disappointed the market by not unveiling immediate measures to combat the euro zone debt crisis.

Draghi heightened speculation of further bank purchases of Italian and Spanish bonds when he said last week that he would do “whatever it takes to preserve the euro.”

However, Draghi stopped short of providing quick action. Instead, he said the ECB will draw up a mechanism in the coming weeks to make outright purchases to stabilize stressed euro zone borrowing costs.

“Expectations got a little inflated. Draghi deflated those expectations,” said John Clinkard, chief economist at Deutsche Bank Canada.

Global stock markets and the euro tumbled and the Canadian dollar touched C$1.0080 versus the greenback, or 99.21 U.S. cents, its weakest in nearly a week.

“It seems the ECB was caught off guard by the aggressive rhetoric from Draghi last week,” said Dean Popplewell, chief currency strategist at OANDA.

“Draghi came out of the gate swinging. Once the market realized there was no firm action and that this is still a work in progress ... risk-off was again applied rather quickly.”

At 1:40 p.m. EDT (1740 GMT), the Canadian dollar was at C$1.0074, or 99.27 U.S. cents, pulling back from a session high C$1.0002, or 99.98 U.S. cents as Draghi began a press conference.

Avery Shenfeld, chief economist at CIBC World Markets, said he expects that by September the ECB will be in a better position to announce the details.

The disappointment follows Wednesday’s statement by the Federal Reserve, in which the U.S. central bank said the economy was weaker but left policy on hold.

The Fed stopped short of offering new monetary stimulus even as it signaled further bond buys could be in store, sending riskier assets like stocks and some metals prices like copper lower. <MET/L>

Elsewhere on Thursday, data also showed the number of Americans filing new claims for jobless benefits rose less than expected last week.

BONDS HIGHER

The uncertain global economic outlook prompted TD Economics to lower its forecasts for Canadian government bond yields on Thursday.

TD now sees the 10-year yield falling to 1.55 percent in the third-quarter after hitting a record low of 1.565 percent last month. The bank also sees the 30-year yield, which hit 2.194 percent last month, reaching a record low 2.15 percent this quarter.

Canadian bond prices were higher across the curve with the two-year bond up 6 Canadian cents to yield 1.060 percent, and the benchmark 10-year bond 38 Canadian cents to yield 1.671 percent.

Editing by Dave Zimmerman

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