April 30, 2008 / 9:30 PM / in 10 years

Canadian dollar ends higher versus weak greenback

TORONTO, April 30 (Reuters) - The Canadian dollar closed higher versus a generally weaker U.S. dollar on Wednesday as the U.S. Federal Reserve cut interest rates and left the door open to further easing.

Canadian bond prices ended higher across the curve as data that showed Canada’s economy unexpectedly shrank in February triggered a gain that was beefed up after a Fed statement that was seen as dovish by some.

The Canadian dollar closed at C$1.0072 to the U.S. dollar, or 99.29 U.S. cents, up from C$1.0119 to the U.S. dollar, or 98.82 U.S. cents, at Tuesday’s close.

Some of the gains followed the Fed’s widely expected quarter-percentage-point cut to the fed funds rate, to 2 percent, which came with a statement that left the central bank’s next move unclear.

“The FOMC statement had been looked at as potentially being a savior for the U.S. dollar and instead it seems like the Fed ... still remains wary of the economic outlook and left open the door for further rate cuts,” said David Watt, senior economist at RBC Capital Markets.

“They didn’t really indicate a pause and they indicated that the inflation risks are not as worrisome for them as some in the market had been speculating about.”

Earlier in the session, the Canadian dollar hit its highest level in a week - C$1.0037 to the U.S. dollar - due in large part to month-end flows. It gave back some of the gains but rose again as the greenback slipped after the Fed rate decision.

Comments from Bank of Canada officials to the House of Commons Finance Committee late in the session did not have much of an impact on the currency.

Bank of Canada Governor Mark Carney repeated that Canada will likely need to add monetary stimulus, but that it will depend on the evolution of the global economy and domestic demand.

Last week the Bank of Canada cut its overnight rate by 50 basis points to 3.00 percent, which brought the cumulative reduction in the key rate to 150 basis points since December.

BONDS RALLY

Canadian bond prices rose early in the session as data showed Canada’s gross domestic product fell 0.2 percent in February from January versus expectations for a 0.2 percent increase.

They then held steady before making another run higher, this time alongside U.S. Treasuries after the Fed failed to signal that it was considering a pause in rate cuts.

“People were sitting on the sidelines not wanting to expose themselves to the risk of a Fed decision and all the wildness that often ensues,” said Eric Lascelles, chief economics and rates strategist at TD Securities.

“Then when the decision came out people felt more comfortable getting back into the market, back into bonds, and as a result we saw a rally.”

Other Canadian data released during the session showed industrial product prices increased by 1.7 percent in March from February, topping estimates for a gain of 0.9 percent.

The 10-year bond climbed 85 Canadian cents to C$103.18 to yield 3.585 percent.

The yield spread between the two- and 10-year bonds was 85.0 basis points, up from 83.3 at the previous close.

The 30-year bond added C$1.70 to C$115.60 to yield 4.078 percent. In the United States, the 30-year Treasury yielded 4.469 percent.

The three-month when-issued T-bill yielded 2.68 percent, down from 2.75 percent at the previous close. (Editing by Peter Galloway)

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