Here come the currency devaluations to steady U.S. dollar

Canada Unexpectedly Cuts
Interest Rate as Its Dollar Gains

By Greg Quinn
Bloomberg News Service
Tuesday, December 4, 2007

http://www.bloomberg.com/apps/news?pid=20601082&sid=adNteV4cK0jg

OTTAWA, Canada -- The Bank of Canada unexpectedly cut interest rates for the first time in more than three years after a soaring Canadian dollar and financial market "volatility" restrained inflation faster than the bank forecast.

The central bank lowered its target rate for overnight loans between commercial banks by a quarter point to 4.25 percent, reversing a July increase. Twelve of 27 economists surveyed by Bloomberg News predicted the cut, and some analysts called for another reduction next year.

"We are likely going to see another cut," said Paul Ferley, assistant chief economist at Royal Bank of Canada, the country's biggest lender. "Going into the fourth quarter, our sense is the growth rate in Canada could get halved" from 2.9 percent in the third quarter, he said.

The Canadian dollar weakened to a 10-week low after the announcement to C$1.0139 per U.S. dollar at 9:45 a.m. in Toronto. The currency reached an all-time high of 90.58 Canadian cents per U.S. dollar on Nov. 7.

The currency's rise this year slowed the exports that make up 30 percent of the country's economic output, and pushed the central bank's preferred inflation measure below its 2 percent target. Companies ranging from Montreal jet maker Bombardier Inc. to Vancouver lumber producer Canfor Corp. said the dollar's rise was crushing manufacturers and exporters.

The central bank said today that "difficulties" caused by the collapse of the U.S. subprime mortgage market will take longer than expected to fix. Also, policy makers said weaker U.S. demand will hurt exporters, while "competitive pressures" related to the currency's "spike" last month are curbing inflation.

"The bank now expects inflation over the next several months to be lower than was projected," the central bank said today in a statement from Ottawa. "In light of this shift, the bank has decided to lower the target for the overnight rate."

The country's trade surplus narrowed to a nine-year low of C$2.7 billion in September, the same month the currency reached parity with the U.S. dollar for the first time since 1976.

Growth in the consumer price index, minus eight volatile items such as gasoline, has declined from 2.5 percent in June to 1.8 percent in October, the slowest since June 2006. Policy makers use the so-called core inflation rate to gauge future trends.

"What we've got is not only a rate cut but an official adoption of a downside risk" scenario, said Stewart Hall, market strategist at HSBC Securities in Toronto. "The door remains open to further policy adjustments."

There are still signs that inflation may quicken. The unemployment rate fell to a 33-year low of 5.8 percent in October and average hourly wages rose 4.1 percent from a year earlier, the third straight month they gained more than 4 percent.

The central bank repeated today the economy is operating beyond full capacity. In recent months it has said the economy is strained by strong domestic demand and high prices for the country's energy and metals.

This was Governor David Dodge's second-last rate decision before he retires Jan. 31 and is replaced by Mark Carney, a former Goldman Sachs Group Inc. investment banker. Carney, 42, is scheduled to appear at the House of Commons Finance Committee tomorrow to discuss his views on the currency and other issues, the first-ever appointment hearing for a governor-designate.

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