January 27, 2010 / 2:36 PM / in 8 years

C$ sags as greenback gains after Fed

TORONTO (Reuters) - The Canadian dollar softened against the U.S. dollar on Wednesday as the greenback gained after the U.S. Federal Reserve kept interest rates near zero and was slightly more optimistic about the U.S. economy.

The U.S. dollar rose to a six-month high against the euro after the event. And, while the U.S. central bank said it would keep interest rates low for some time yet, a dissenting vote from one official suggested pressure was building for a tighter monetary policy.

“The (Federal Open Market Committee) was slightly more hawkish than some had expected so that helped the U.S. dollar a little bit,” said Camilla Sutton, currency strategist Scotia Capital. “Generally, we’re having a U.S. dollar positive day.”

The Canadian dollar finished at C$1.0647 to the U.S. dollar, or 93.92 U.S. cents, down slightly from Tuesday’s finish at C$1.0625 to the U.S. dollar, or 94.12 U.S. cents.

While the policy statement from the Fed was a key factor influencing markets, Sutton said the Canadian dollar was also under pressure due to broader concerns about the pace of global economic growth.

“I think it’s more a story of risk aversion. Overall, the U.S. dollar has gotten a little bit better bid as risk aversion has come into the market and there’s some fears about global growth and the impact of tighter policy in China,” she said.

“That’s probably the main driver and that’s hurting commodities and the Canadian dollar.”

The price for oil, a key Canadian export, slipped below $74 a barrel, pressured by rising U.S. inventories due to soft demand, while gold prices were also weaker.

Market watchers said the focus would now likely shift to U.S. President Barack Obama’s State of the Union address on Wednesday evening for comments on the U.S. economic recovery.

Questions were also overhanging markets about whether Ben Bernanke would win a second term as chairman of the Federal Reserve.


Government bond prices were softer at the front end of the curve, influenced by the U.S. Treasury market, where debt prices sagged after one Federal Reserve policymaker dissented from a decision to leave interest rates near zero.

“The biggest thing of note was there was one dissenter. That hints at a more slightly hawkish tone,” said Sutton.

Earlier, Canadian bonds had drawn a safe haven bid in the wake of jitters over Greece’s fiscal health and an unexpected drop in U.S. new home sales.

Earlier in the session, a $42 billion U.S. auction of five-year notes proved popular with bidders, while in Canada, an auction of two-year bonds due 2012 was also well received.

The two-year bond was down 8 Canadian cents at C$100.07 to yield 1.212 percent, while the 30-year bond climbed 30 Canadian cents to C$117.35 to yield 3.955 percent.

Canadian bonds outperformed U.S. notes across the curve, with the Canadian two-year bond 30.5 basis points above the U.S. 2-year yield, compared with about 36 basis points in the previous session.

Editing by Rob Wilson

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