NEWS / Foreign Exchange

Dollar touches 91 US cents, bonds mixed

TORONTO - The Canadian dollar shot to new 28-year highs versus the U.S. dollar on Tuesday, briefly popping above 91 U.S. cents as the greenback continued to struggle, while commodity prices and merger-related interest fueled the loonie's rise.

Bond prices were mixed ahead of Wednesday's U.S. interest rate decision.

The currency finished at C$1.1005 to the U.S. dollar, or 90.87 U.S. cents, up sharply from C$1.1127 to the U.S. dollar, or 89.87 U.S. cents, at Monday's close.

The loonie opened the week appearing to be ready to retreat from the highs hit last week, but it led all major currencies on Tuesday, charging up more than 1 percent to top out at 91.12 U.S. cents, a level last seen in January 1978.

"It was the flavor of the day," said Jack Spitz, director of foreign exchange at National bank of Canada.

"Some momentum names were on the offer in dollar/Canada, taking it through stops, and all correlated markets were lining up to support the Canadian dollar."

The U.S. currency continued to suffer from worries over the big U.S. current account deficit, talk that Asian central banks are diversifying their holdings away from the greenback, and expectations that the U.S. Federal Reserve will signal on Wednesday that it is done raising interest rates.

The sagging greenback was only part of the story, however, as the Canadian currency got an added lift from strong commodity prices.

"That gold is on the cusp of the $700 mark and oil has unwound yesterday's losses is certainly complementary of the move on the loonie," said HSBC Securities Canada strategist Stewart Hall.

Merger-related flows from the Canadian mining sector were also a support, he said, sparked by Teck Cominco's (TEKsvb.TO: ) bid for Inco (N.TO: ) on Monday, which seemed to open the door to foreign offers for Falconbridge Ltd. (FALlv.TO: ), which is currently the target of a takeover bid by Inco.

Wednesday's market action will likely hinge on the U.S. central bank, which is expected to raise its fed funds rate for the 16th straight time, but is also seen signaling it is ready to pause in its two-year tightening campaign.