Canadian Dollar Rises Above 91 Cents for First Time Since 1978May 9, 2006
Bloomberg
Canada's dollar rose above 91 U.S. cents for the first time since 1978 as surging gold and oil prices boost prospects in the world's eighth-largest economy.
The Canadian dollar strengthened against the 16 primary currencies, including the euro, British pound and New Zealand dollar, on speculation the Canadian economy may get more support from commodities, which account for 35 percent of Canada's exports and about 10 percent of its C$1.09 trillion ($990 billion) economy.
"It's again the same old story,'' said Firas Askari, head currency trader at BMO Nesbitt Burns in Toronto. "Gold has hit a new record, and oil is trading higher. All these factors are fueling gains in the Canadian dollar.''
Canada's dollar increased to 90.87 U.S. cents at 4:01 p.m. in Toronto, from 89.94 U.S. cents yesterday. One U.S. dollar buys C$1.1005. The Canadian dollar touched 91.10 U.S. cents today, the highest since 91.40 U.S. cents on Jan. 6, 1978. The Canadian currency was last at parity with the U.S. in 1976.
Crude oil rose above $71 a barrel after the U.S. government said a letter from the Iranian president hasn't reduced its determination to halt Iran's nuclear research. Crude oil for June delivery rose 92 cents, or 1.3 percent, to close at $70.69 a barrel on the New York Mercantile Exchange.
Gold surged above $700 an ounce in New York for the first time since October 1980 and platinum climbed to a record. Gold futures for June delivery rose $21.60, or 3.2 percent, to $701.50 an ounce, the highest closing price since Sept. 25, 1980.
CHINA'S IMPACT
China's government was urged by economists to quadruple gold reserves to 2,500 tons from 600 tons, Reuters said, citing an official industry newspaper. Gold should comprise as much as 5 percent of China's foreign-exchange holdings, from 1.3 percent now, Liu Shanen, an expert at the Beijing Gold Economy Development Research Centre, told a conference, Reuters quoted the China Gold newspaper as saying.
The currency has also benefited from foreign money flowing into the country for purchases of Canadian companies, according to T.J. Marta, senior currency strategist at RBC Capital Markets in New York.
A U.S.-based group is expected to finish its acquisition of Toronto-based Fairmont Hotels & Resorts for $3.7 billion tomorrow, Marta said. Another $700 million is scheduled for the rest of this month for buying Canadian companies, Marta wrote in a research report on May 5.
A net $6.6 billion inflow last month related to foreign companies buying Canada's energy assets helped boost the currency, according to RBC's analysis. It was the sixth-highest monthly amount since 1997, and the most since December.
`SELLING PRESSURE'
"There could be some selling pressure in the Canadian dollar because M&A inflows are a little artificial in nature,'' said Maria Jones, currency strategist at TD Securities Canada Inc. in Toronto.
The commodity boom is likely to keep the Canadian dollar strong. The currency will surpass the 93-cent level by June 30, according to a forecast by TD Securities.
Gains in the Canadian currency may be limited as investors await the U.S. Federal Reserve's meeting tomorrow.
The Fed will raise its benchmark interest rate for the 16th time since June 2004 tomorrow to 5 percent, according to all 84 economists in a Bloomberg survey.
The Bank of Canada boosted its benchmark interest rate six times since September to 4 percent. Higher interest rates entice international investors to buy financial assets in a country, boosting demand for the local currency.
FED RATE HIKE IN JUNE?
"The Fed may leave the door open for another rate hike in June, expanding its rate spread with Canada,'' said Boris Schlossberg, senior currency strategist at Forex Capital Markets LLC in New York. "This will be in the Canadian dollar's disfavor.''
Canada's dollar dropped the most in more than a month yesterday after a government report showed housing starts slowed in April, raising speculation the Bank of Canada may be less likely to keep lifting borrowing costs this year.
Investors also sold the currency after Bank of Canada Governor David Dodge said May 3 the currency's surge above 90 U.S. cents isn't closely related to demand for the country's products.
"There are some risks to these gains as well,'' Askari said. "If the Bank of Canada perceived these gains as speculative, I expect some shift in the monetary policy.''
The Bank of Canada may raise the interest rate to 4.25 percent by June 30 and pause throughout the year, according to the median forecast of 11 economists in a Bloomberg monthly survey taken from April 28 through yesterday. The forecast was up from 4 percent in a previous poll.
Canada's benchmark two-year bond's yield was down 2 basis points to 4.10 percent. The price of the 3.75 percent bond maturing in June 2008 increased 3 cents to C$99.31. Bond yields move inversely to prices.
The yield on the two-year bond will rise to 4.43 percent by June 30, according to the median estimate of six economists in a Bloomberg monthly poll over the same time.
To contact the reporter on this story: Haris Anwar in Toronto at hanwar2@bloomberg.net.
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