Canada Dollar Reaches 30-Year High on Interest-Rate Speculation

Canada's dollar rose a fourth straight day, reaching a 30-year high, as investors speculated the Bank of Canada will raise interest rates tomorrow to cool the economy.

The currency's rally is its longest since April. The central bank will lift the overnight rate by a quarter- percentage point to 4.5 percent tomorrow, according to 28 of 29 economists surveyed by Bloomberg News. Policy makers on May 29 said rate increases may be needed ``in the near term,'' citing ``excess demand'' in the world's eighth-biggest economy.

``The Canadian currency will do better against the low- yielding currencies,'' said Phyllis Papadavid, a currency strategist at Lehman Brothers Holdings Inc. in London. ``Any indication that bank would keep on with its monetary tightening drive would expedite that move.''

Canada's dollar rose to 95.38 U.S. cents at 9:23 a.m. in Toronto, from 95.28 U.S. cents on July 6, and reached 95.74 cents, the highest since March 3, 1977. One U.S. dollar buys C$1.0483. The currency last traded at par with the U.S. dollar in 1976.

Canadian policy makers, who lifted the benchmark lending rate a quarter-point to its current level of 4.25 percent in May 2006, will announce their rate decision tomorrow at 9 a.m. New York time.

Franc and Yen

Papadavid recommends buying the Canadian dollar against the Swiss franc and yen because Canada's higher interest rates make its assets attractive. Switzerland's benchmark rate is 2.5 percent, and Japan's is 0.5 percent.

Futures show investors are betting on two rate increases this year by Canada's central bank. December bankers' acceptances futures contract yielded 5.02 percent today, up from 4.87 percent on June 29. These futures have settled at a three- month lending rate averaging 16 basis points above the central bank's rate target since Bloomberg started tracking the data.

The Canadian dollar has gained 11.2 percent against the U.S. dollar this year amid increasing global demand for Canadian commodities such as crude oil and copper. Oil fell from near a 10-month high today.

The commodity boom is causing housing and labor shortages in oil-producing provinces, sending home prices to records and pushing the national jobless rate to a three-decade low of 6.1 percent. Inflation minus volatile items such as fuel rose to a four-year high of 2.5 percent in April. The measure, which central bankers use to gauge future trends, slowed in May while remaining above the central bank's target of 2 percent.

The yield on Canada's 10-year benchmark 10-year bond was little changed at 4.69 percent. The price of the 4 percent security maturing in June 2016 was C$95. Bond yields move inversely to prices.

source:bloomberg.com