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TORONTO — The Canadian dollar rose to its highest level since July 2008 on Tuesday after the U.S. Federal Reserve held benchmark interest rates near zero, as expected, and renewed its promise to keep them exceptionally low for an extended period.

Building on momentum from firmer oil and equities prices and stronger-than-expected domestic economic data, the Canadian dollar rose as high as $1.0135 to the U.S. dollar, or 98.67 U.S. cents, after the U.S. central bank’s decision.

Tuesday’s rise marked the resumption of the currency’s upward march after pausing on Monday as investors took a break after an 11-day stretch of gains.

The Canadian dollar ended at $1.0140 to the U.S. dollar, or 98.62 U.S. cents, up from Monday’s close at $1.0197 to the U.S. dollar, or 98.07 U.S. cents.

The outcome of the U.S. interest rate decision was widely expected, though the U.S. central bank also pointed to increased momentum in the economy’s recovery.

“I’d say we’ve had a minimal reaction to the Fed release. There was very little changes from the FOMC,” said Camilla Sutton, currency strategist at Scotia Capital.

“It was a risk-on day where the U.S. dollar was generally weaker across the board and most risk assets are doing well. If we see that continue I think that just pushes the Canadian dollar one step closer to parity.”

The day’s domestic data also provided more proof the Canadian economy is moving to a surer footing as figures showed January manufacturing sales higher than expected and labor productivity rising for the first time in more than a year.

“Certainly it’s pointing to solid growth being sustained,” said Paul Ferley, assistant chief economist at Royal Bank of Canada. “At the moment, we’re still of the view that we’ll see some moderation from the 5% (gross domestic product) gain in the fourth quarter.”

He said the data was consistent with his forecast that first-quarter growth would be just under 4%, although it could be higher if statistics continue to come in very firm.

Earlier, Finance Minister Jim Flaherty appeared more relaxed with the Canadian dollar’s sharp appreciation as he said the currency’s recent rally in part reflects the country’s healthy fiscal position, and does not suggest extraordinary volatility.

BONDS FIRM AFTER FED ANNOUNCEMENT

Canadian bond prices were mildly firmer Tuesday after the Fed repeated it plans to keep interest rates low for an extended period.

“I don’t think it caught any one by surprise. But there were some expectations that there could be a word change,” said Sheldon Dong, fixed income analyst at TD Waterhouse Private Investment.

“It’s much more of a relief rally than anything else, coupled with thin trading conditions.”

The two-year government bond was up 4 Canadian cents at $99.92 to yield 1.541%, while the 10-year bond gained 40 Canadian cents to $102.41 to yield 3.442%.

Canadian bonds were mixed against their U.S. counterparts. The difference between 10-year yields widened 0.8 of a basis point to 21.1 basis points.

© Thomson Reuters 2009

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