Dollar hits one-week low as BoC toughens language

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(Reuters)

By Frank Pingue

TORONTO (Reuters) - Canada's dollar tumbled 2 U.S. cents to its lowest level in more than a week on Tuesday after the Bank of Canada said the strength of the currency is more than fully offsetting favorable economic developments.

In a policy statement, the central bank left its key overnight interest rate steady at a record low 0.25 percent and also said a return to economic normalcy would be delayed.

That news, combined with a rebound in the U.S. dollar, sent Canada's currency down to as low as C$1.0528 to the U.S. dollar, or 94.98 U.S. cents, its lowest level since October 9.

"It was a much more aggressive statement than we've seen in the past," said Matthew Strauss, senior currency strategist RBC Capital Markets. "In June, when they came out quite strongly warning about the adverse impact of the Canadian dollar they only indicated it would just fully offset."

But on Tuesday, the Bank of Canada toughened the tone of its statement and said the current strength in the dollar is expected, over time, to "more than fully offset the favorable developments since July".

By 2:10 p.m. EDT (1810 GMT), the Canadian unit had rebounded slightly to C$1.0500 to the U.S. dollar, or 95.24 U.S. cents, still down from C$1.0293 to the U.S. dollar, or 97.15 U.S. cents, at Monday's close.

Another drag on the Canadian dollar was the backdrop of lower prices for oil, a key Canadian export whose price often dictates the currency's direction. The price of oil fell after hitting a one-year high over $80 a barrel.

The latest pullback for the Canadian dollar comes only days after the currency came just about 2 U.S. cents short of rising above the U.S. dollar for the first time in over a year.

It is still up about 20 percent from the four-year low it tumbled to in early March.

BOND PRICES HIGHER

Canadian bond prices were higher across the curve, boosted by the Bank of Canada statement, weak equity markets and economic data that did little to support the idea of a recovering economy.

Equity markets in the United States and Canada were lower as investor appetite for riskier assets faded as data pointed to a sluggish economic recovery.

Canadian data showed wholesale trade fell in August by a steeper-than-expected 1.4 percent from July.

In the United States, softer-than-expected housing starts last month and a drop in prices paid at the farm and factory gate backed views that U.S. interest rates could stay low for a while.

"Fairly dovish results from the Bank of Canada and equity markets soreness," said Sheldon Dong, fixed income analyst at TD Waterhouse Private Investment. "Those are the key driving points, plus the economic data in Canada and the United States were a bit softer than expected."

The two-year bond was up 28 Canadian cents at C$99.50 to yield 1.492 percent, while the 30-year bond rose 75 Canadian cents to C$117.95 to yield 3.928 percent.

Canadian bonds mostly outperformed U.S. Treasuries, which extended gains on weaker-than-expected U.S. economic data.

The yield on the two-year Canadian government bond was about 57 basis points above its U.S. counterpart, down from 66 basis points at the close of trading on Monday.

(Editing by Peter Galloway)