April 29, 2008 / 9:24 PM / 10 years ago

Canadian dollar edges higher ahead of Fed

TORONTO (Reuters) - The Canadian dollar edged higher against the U.S. currency on Tuesday, but stayed in a close range as investors looked ahead to a key interest rate decision by the U.S. Federal Reserve.

<p>Newly pressed Canadian one dollar coins at the Royal Canadian Mint in Winnipeg on November 14, 2007. REUTERS/Fred Greenslade</p>

Domestic bond prices pushed higher, outperforming U.S. treasuries slightly as Canadian stocks fell hard.

The currency finished at C$1.0119 to the U.S. dollar, or 98.82 U.S. cents, up slightly from C$1.0127 to the U.S. dollar, or 98.75 U.S. cents, at Monday’s close.

The Canadian currency largely tracked the greenback through the session, with both climbing against the euro as the sense grew that the Fed -- which is expected to lower its key interest rate by a quarter percentage point to 2 percent on Wednesday -- may signal it is ready to stop cutting rates.

“There was a slight, slight bid tone to the Canadian dollar, but it was in very tight ranges,” said Matthew Strauss, senior currency strategist at RBC Capital Markets.

Strauss said the Canadian dollar may have benefited slightly from investors reluctant to stay in the greenback on worries the U.S. central bank may surprise by signaling more easing.

The Fed announcement is expected to overshadow February’s domestic economic growth data and U.S. first-quarter GDP data due early on Wednesday.

“If we do get some surprises on GDP data, we could see some market reaction, but I would expect it to be relatively brief,” said Strauss.

Canadian industrial product price and raw materials price indexes for March are also due on Wednesday.

Weaker oil prices seemed to have little impact on the Canadian dollar during the session.

BONDS RISE

Domestic bond prices ended higher, benefiting from a safe-haven bid following gloomy U.S. consumer and housing sector data, while outperforming U.S. debt prices.

“Canada seemed to outperform on the short end, and I think you can attribute that to the worse equity performance in Canada,” said Eric Lascelles, chief economics and rates strategist at TD Securities.

The Toronto Stock Exchange’s main stock index dropped a sharp 1.85 percent on Tuesday, prompting many to embrace safer fixed-income investments.

Concerns that the Fed may signal more rate cuts could also have been drawing investors to bonds, said Lascelles.

The overnight Canadian Libor rate was 3.0217, down from 3.0500 on Monday.

The two-year bond rose 4 Canadian cents to C$101.81 to yield 2.852 percent. The 10-year bond climbed 31 Canadian cents to C$102.41 to yield 3.685 percent.

The yield spread between the two- and 10-year bonds was 83.3 basis points, down from 85.2 at the previous close.

The 30-year bond added 61 Canadian cents to C$114.01 to yield 4.164 percent. In the United States, the 30-year treasury yielded 4.560 percent.

The three-month when-issued T-bill yielded 2.75 percent, down from 2.76 percent at the previous close.

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