Wednesday June 13, 2007 - 20:48:54 GMT
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Reuters - www.reuters.com
Forex Market News - Canada mulls why C$ so strong, set to raise rates
Canada mulls why C$ so strong, set to raise rates
Wed Jun 13, 2007 4:00pm ET19
By Janet Guttsman
ST. JOHN'S, Newfoundland, June 13 (Reuters) - A booming economy and stronger than expected inflation will prompt higher Canadian interest rates, the head of the central bank said on Wednesday in an address that pondered, without conclusion, just why the Canadian dollar has soared so high.
Speaking in the Atlantic province of Newfoundland and Labrador, Bank of Canada Governor David Dodge admitted the Canadian dollar had risen further and faster than the central bank had expected.
But he said inflationary risks were rising too, pushing inflation above the bank's 2 percent target, and the economy was growing a full percentage point faster than the central bank expected.
"At our last fixed announcement date we said that some increase in the target for the overnight rate will be required in the near term to bring inflation back to the target," Dodge said, giving no hint that anything had happened to change that view.
Many economists now expect the Bank of Canada will raise rates on July 10 for the first time in over a year. A quarter-point rise would bring the benchmark overnight rate to 4.5 percent, still well below the corresponding U.S. Fed Funds rate of 5.25 percent.
Dodge, who retires in January, said the Canadian dollar's rise since April has been faster than past experience would suggest. But he stopped short of pinning the gains on speculative trading.
The currency hit a 30-year high last week and is up 7 percent since the end of March. On Wednesday afternoon it was at C$1.0661, or 93.80 U.S. cents. Continued...
Markets had been watching Dodge's remarks closely for clues to his thinking about the currency's precipitous rise.
Dodge said there was no cause for the central bank to sell Canadian dollars to depress the currency because factors that would trigger that -- disorderly markets or extreme volatility -- were absent.
He said Bank of Canada intervention policy, posted on its Web site, is different from that of the New Zealand central bank, which recently sold New Zealand dollars to drive the currency lower.
But despite his obvious surprise at the domestic dollar's strength, Dodge said the bank did not have enough data yet to conclude whether there was more behind the rise than just strong demand for Canadian commodities and for its goods and services.
"One needs to be very careful not to interpret this day-to-day, week-to-week (Canadian dollar move) as a long-term trend," he said.
He declined to comment on some economists' forecasts that the Canadian dollar would rise to parity with the U.S. currency.
"Some of those same economists are the ones who predicted the Canadian dollar would go to 50 (U.S.) cents, so I think you take those predictions for what they're worth," he said.
The manufacturing sector has complained that the strong dollar makes it hard for firms to compete abroad. Government officials admit that's true, but say it also lowers the cost of machinery and raw materials, which businesses need to be competitive.
Asked if he was worried about the rise in the Canadian dollar, Dodge sounded almost mournful.
"We worry about everything. We're paid to worry at a central bank," he sighed.
Â© Reuters 2007. All Rights Reserved.
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