Tuesday August 19, 2008 - 21:29:27 GMT
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Forex Market News - Canadian dollar rises as greenback slumps
Tue Aug 19, 2008 5:12pm EDT
By John McCrank
TORONTO (Reuters) - The Canadian dollar rose against the
U.S. dollar on Tuesday as the greenback weakened due to market
doubts that the U.S. Federal Reserve would be able to raise
interest rates to control inflation because higher rates might
amplify the country's economic woes.
Canadian bond prices fell on firm Canadian wholesale trade
data and a higher than expected U.S. inflation report.
The Canadian dollar closed at C$1.0610 to the U.S. dollar,
or 94.25 U.S. cents, up from C$1.0643 to the U.S. dollar, or
93.96 U.S. cents, at Monday's close.
The currency was initially lower as the U.S. dollar gained
strength across the board after a report early in the day
showed that U.S. inflation, in the form of producer prices, had
risen to a 27-year high according to the year-over-year
headline figure.
But the greenback's strength faded as uncertainty grew
about whether the U.S. Federal Reserve would consider raising
interest rates to control inflation at a time when the U.S.
economy still appears to be in bad shape.
"Those real hawks out there are sort of interpreting it as
the Fed must raise rates towards the end of the year," said
Gareth Sylvester, senior currency strategist at HIFX in San
Francisco.
"The doves are a bit more on the fence, thinking that the
last thing we want to see are sharp contractions in growth, or
a succinct period of slowdown with higher levels of inflation
and what that would mean for the U.S. economy."
U.S. economic fears were stoked by continued fallout in the
country's credit sector and more soft data from the housing
sector.
At the same time the U.S. data was released, a Canadian
report showed that a surge in auto sales helped Canadian
wholesale trade in June rise by its largest margin since
February, and ahead of market expectations.
"The wholesale sector is often somewhat overlooked in
Canada, but it represents a reasonably important 5 percent of
the Canadian economy, and it tends to punch above its weight in
terms of its relevance for GDP forecasting," said Eric
Lascelles, chief economics and rates specialist at TD
Securities, in a note.
The next major Canadian data will be June's retail sales
report on Wednesday.
Retail sales are expected to have risen 0.4 percent in June
and 0.5 percent after stripping out auto sales.
The previous month, retail sales missed analysts'
expectations and contributed to a 0.7 percent slide in the
Canadian dollar the day the data was released.
Canadian inflation numbers for July are due Thursday.
BOND PRICES FALL
Canadian bond prices initially rose on the back of credit
worries coming out of the United States, but slipped steadily
lower during the day.
"Gains couldn't be held on to because of that combination
of firmer (U.S.) inflation data and stronger wholesale trade in
Canada," said Mark Chandler, fixed income strategist at RBC
Capital Markets.
The two-year bond fell 3 Canadian cents to C$101.74 to
yield 2.741 percent. The 10-year bond fell 25 Canadian cents to
C$105.62 to yield 3.563 percent.
The yield spread between the two-year and 10-year bond was
83.1 basis points, down from 85 basis points at the previous
close.
The 30-year bond lost 72 Canadian cents to C$116.53 for a
yield of 4.024 percent. In the United States, the 30-year
treasury yielded 4.466 percent.
The three-month when-issued T-bill yielded 2.45 percent,
down from 2.54 percent at the previous close.
(Editing by Peter Galloway)
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