* C$ hits February high at 96.26 U.S. cents
* Highest against euro since Oct 2007
* Bonds drop as rate, inflation fears linger
By Claire Sibonney
TORONTO, Feb 19 (Reuters) - The Canadian dollar hit its
highest level against the U.S. currency in nearly a month on
Friday after U.S. inflation data showed prices rose less than
expected, calming markets made jittery by Thursday's surprise
hike in the U.S. discount rate.
The U.S. Federal Reserve said late on Thursday it would
increase the discount rate to 0.75 percent from 0.50 percent,
effective Friday, although it left the benchmark federal funds
rate, its main policy tool, unchanged near zero.
The move pushed the U.S. dollar higher on speculation
that the Fed could move sooner than expected to raise its
But U.S. data on Friday that showed consumer prices
excluding food and energy fell in January for the first time
since 1982, supported the Federal Reserve's contention that it
would keep its benchmark interest rate low for an "extended
period", weakening the greenback again. [ID:nN19117929]
"The Canadian dollar's had a great North American session.
Obviously there was a lot of chaos overnight with the Fed
hiking the discount rate unexpectedly," said Steve Butler,
director of foreign exchange trading at Scotia Capital. .
"The outlook is still very favorable for Canada going
The price of oil, which often influences the Canadian
dollar, rose toward $80 a barrel as refinery strikes in France
and tensions about Iran's nuclear program raised concerns about
Gold also reversed early losses, which further supported
the commodity-linked currency.
"Commodities in general are a little bit better today but I
think the market is paying a little less attention," said
"It should be paying a little less attention to the
intraday swings in some of the commodity markets and focusing
on the fact that the fundamentals in the Canadian economy are
steadily improving," he said. "Against the global backdrop of
everything else that's going on around us, Canada seems to be a
relatively safe place at the moment."
The Canadian dollar closed at C$1.0405 to the U.S. dollar,
or 96.11 U.S. cents, up from Thursday's close at C$1.0414, or
96.02 U.S. cents. Earlier, the currency hit C$1.0388 or 96.26
U.S. cents, its highest level in nearly a month.
It had weakened as low as C$1.0531, or 94.96 U.S. cents
earlier, under pressure from the Fed's discount rate hike.
The Canadian dollar was one of the top performing major
currencies on Friday, reaching its highest against the euro
since October 2007 at C$1.4095.
CANADIAN BOND MARKETS WARY
Still dazed by the Fed move and Thursday's
higher-than-expected domestic inflation data, Canadian
government debt prices dropped, with additional pressure from
stronger equity markets.
A softer reading on U.S. inflation did little to boost
sentiment, as analysts read into the details more closely,
particularly the influential 2.1 percent decline in the price
of lodging away from home.
"Parts of the U.S. had unseasonably cold weather, but also
if you remember back to the Boxing Day bomber, there was a
little bit of a security clampdown, a little bit of nervousness
which may have dampened some travel within the U.S. itself,"
said Tom Nakamura, a fixed-income portfolio manager at AGF
"We think that may turn out to be a fairly temporary thing
so we'll watch that."
Nakamura said investors are also still concerned about
extraordinary monetary policy, such as near-zero interest rates
and liquidity measures, that will need to be unwound.
"The timing and the pace surrounding that is a big question
mark and that question mark leads to a lot of uncertainty in
the markets and the risk is that we do find ourselves leaving
liquidity measures too long or keeping rates too low, which
would fuel inflation pressures down the road," he said.
The two-year Canadian government bond <CA2YT=RR> was off 4
Canadian cents at C$100.205 to yield 1.396 percent, while the
10-year bond <CA10YT=RR> fell 6 Canadian cents to C$101.970 to
yield 3.499 percent.
Canadian bonds lagged their U.S. counterparts, with the
difference between 10-year yields narrowing about 3.1 basis
points from Thursday.
In new issue news, the province of Nova Scotia added C$250
million in a reopening of bonds due June 1, 2041.
(Reporting by Claire Sibonney; editing by Jeffrey Hodgson)