Rate increase seems canceled in Canada too

By Haris Anwar
Bloomberg News Service
Tuesday, August 28, 2007

http://www.bloomberg.com/apps/news?pid=20601082&sid=ainBUWnn3cJA&refer=c...

TORONTO -- Canada's dollar fell for a second straight day after a central bank official suggested that it may not raise interest rates while weighing the effect of global credit market losses.

Investors had expected before the U.S. mortgage lending crisis unfolded in late July that the Bank of Canada would increase borrowing costs more than once this year to stem inflation. Policy makers are scheduled to meet Sept. 5.

"Effectively, the market is taking that as a confirmation of a no-go by the Bank of Canada next Wednesday," said Jack Spitz, director of foreign exchange trading in Toronto at National Bank of Canada. "The currency will continue to struggle as long as this uncertainly prevails in the financial markets."

Canada's dollar fell 0.6 percent to 94.27 U.S. cents at 1:52 p.m. in Toronto. One U.S. dollar buys C$1.0607. The Canadian dollar climbed to 96.71 U.S. cents on July 25, a 30- year high, as the economy strengthened and the Bank of Canada raised interest rates.

The central bank needs to evaluate whether the economy is more vulnerable to slowdowns in the United States since a July economic forecast, Bank of Canada Deputy Governor Pierre Duguay said yesterday in a speech.

"Given recent events in global credit markets, we need to assess the extent to which the risks around our July projections have shifted," Duguay told the Canadian Association for Business Economics in Kingston, Ontario.

The Bank of Canada on July 10 raised its benchmark lending rate to 4.5 percent and said further increases may be needed to stem inflation. Sentiment changed after U.S. subprime losses spread to Canada and central banks globally added money to financial systems to ease a credit squeeze.

"Tighter market conditions have already substituted for a need to hike overnight rates," said Avery Shenfeld, senior economist at CIBC World Markets in Toronto. "The Bank of Canada will avoid an additional breaking force on the economy."

The Canadian currency also fell against the yen after traders sold risky assets. So-called carry traders borrow in Japan, where the benchmark interest rate is 0.5 percent, to invest in higher-yielding assets elsewhere. The Canadian dollar fell 1.4 percent to 108.32 against the Japanese currency.

The yield on Canada's two-year bond fell 6 basis points, or 0.06 percentage point, to 4.13 percent, touching the lowest in almost a week. The price of the 3.75 percent security due in June 2009 rose 11 cents to C$99.35. Bond yields move inversely to prices.

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