June 11, 2008 / 8:45 PM / in 9 years

Dollar rises for second day on rates

TORONTO (Reuters) - The Canadian dollar rose for a second straight session versus the U.S. dollar on Wednesday as a surprise decision by the Bank of Canada to leave interest rates steady continued to offer support.

A jump in oil prices of more than $5 a barrel also helped fuel the gain in the commodity-linked Canadian dollar. Canada is a major oil exporter. The currency rose 0.2 percent on Wednesday.

The Canadian dollar closed at C$1.0200 to the U.S. dollar, or 98.04 U.S. cents, up from C$1.0224 to the U.S. dollar, or 97.81 U.S. cents, at Tuesday’s close.

Last week the Canadian dollar fell 2.6 percent as traders considered a Bank of Canada rate cut to be a sure bet. But when the bank went against expectations on Tuesday and said it would leave its key rate steady at 3.00 percent, the Canadian dollar staged a rebound that continued on Wednesday.

“I think the Canadian dollar was pressured lower earlier on by expectations that the Bank of Canada might opt for an easier policy stance compared to the United States,” said Paul Ferley, assistant chief economist at Royal Bank of Canada.

“But with the announcement yesterday that line of thinking proved to be incorrect, and because of that we are continuing to see the Canadian currency correct.”

With the Bank of Canada’s key overnight rate steady at 3.00 percent, the Canada-U.S. interest rate gap continues to favor the Canadian currency since the U.S. Federal Reserve’s federal funds rate is 2.00 percent.

The second day of gains for the Canadian dollar came after a slide to C$1.0246, or 97.60 U.S. cents, during the overnight session. But a sliding greenback and higher oil prices opened the door for the Canadian dollar to bounce back.

U.S. crude oil prices shot higher and are now within reach of last week’s record near $140.

BOND PRICES RALLY

Canadian bond prices were given an early boost after two pieces of domestic data came in worse than analysts expected, while the Federal Reserve’s Beige Book also helped.

In Canada, secure assets such as government debt were snapped up after data showed the new home prices were steady in April from March, versus expectations for a 0.4 percent climb.

To a lesser extent, another report that showed Canadian industries ran at 79.8 percent of their capacity in the first quarter, less then the 80.8 percent expected by the market, also helped bond prices.

“Canadian bond market prices seem to be reflecting the pattern in the U.S. (Treasury market),” Ferley said.

“The Canadian housing data did offer some support to the upward trend but I think the dominant factors is you’ve got the move in the U.S. spilling over into Canada.”

In its Beige Book, the Fed said U.S. businesses have faced rising costs in recent weeks but retailers have had only “mixed results” trying to raise selling prices.

With no key economic data due out in Canada the rest of the week, the U.S. market could again dictate direction as data on jobless claims and retail sales are due to be released.

The two-year bond rose 20 Canadian cents to C$100.87 to yield 3.289 percent. The 10-year bond climbed 30 Canadian cents to C$101.48 to yield 3.803 percent.

The yield spread between the two-year and 10-year bond was 51.4 basis points, down from 45.2 at the previous close.

The 30-year bond added 10 Canadian cents to C$113.95 for a yield of 4.166 percent. In the United States, the 30-year Treasury yielded 4.697 percent.

The three-month when-issued T-bill yielded 2.80 percent, unchanged from the previous close.

Editing by Peter Galloway

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