Canadian dollar rallies as market rethinks Fed taper risk

·2-min read
FILE PHOTO: A Canadian dollar coin, commonly known as the "Loonie", is pictured in this illustration picture taken in Toronto

By Fergal Smith

TORONTO (Reuters) - The Canadian dollar strengthened against its U.S. counterpart on Thursday as the greenback broadly declined and the Bank of Canada fretted about imbalances in the country's red-hot housing market.

The loonie, which has benefited from surging commodity prices in recent months, was trading 0.7% higher at 1.2052 to the greenback, or 82.97 U.S. cents, moving back in reach of Wednesday's three-year high at 1.2013.

The U.S. dollar lost ground against a basket of major currencies, hovering just above a multi-month low. On Wednesday, it had rallied after several U.S. Federal Reserve policymakers, in minutes to the Fed's most recent monetary policy meeting, said a discussion about reducing the pace of asset purchases would be appropriate "at some point."

"The FX market appeared to have overreacted to the taper hint, as policy is unlikely to change until the Fed see months more data, and until substantial further economic progress is made," said Ronald Simpson, managing director, global currency analysis at Action Economics.

In contrast, the Bank of Canada last month cut the pace of its bond purchases, becoming the first major central bank to cut back on pandemic-era money-printing stimulus programs.

On Thursday, the BoC said Canada's housing market and high household debt levels had left the economy more vulnerable to economic shocks, but made clear it would not raise interest rates to cool the frenzy.

Canada added 351,300 jobs in April, the third straight month of increases, a report from payroll services provider ADP showed.

The price of oil, one of Canada's major exports, settled 2.1% lower at $62.05 a barrel, after diplomats said progress was made toward a deal to lift sanctions on Iran.

Canadian government bond yields eased across a flatter curve in tandem with U.S. Treasuries. The 10-year was down 3.3 basis points at 1.545%.

(Reporting by Fergal Smith; editing by Jonathan Oatis)

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