NEWS / Foreign Exchange

Canada dollar drops after China ups reserve policy

TORONTO - The Canadian dollar fell hard against the U.S. dollar on Friday after China's central bank decided to increase its reserve requirement, which triggered concerns about future demand for commodities.

At 12:20 p.m. (1620 GMT), the currency was at C$1.1239 to the U.S. dollar, or 88.97 U.S. cents, down from C$1.1129 to the U.S. dollar, or 89.85 U.S. cents, at Thursday's North American close.

The Canadian dollar fell sharply from its session high of C$1.1111 to the U.S. dollar, or 90.00 U.S. cents, but was also off its session low of C$ 1.1251 to the U.S dollar, or 88.88 U.S. cents.

Much of the currency's drop came after China decided to curb the rapid credit growth that its leaders fear could cause the red-hot economy to overheat. China raised the proportion of money banks must keep in their reserves by half a percentage point, effective July 5.

"The Canadian dollar really started losing a lot of ground after that announcement," said Marc Levesque, chief strategist, foreign exchange and fixed income, at TD Securities.

"There is probably some concern that if Chinese authorities are attempting to slow the economy it could have an impact on commodity demand and therefore soften up demand."

Levesque also noted that most of the currencies losing ground to the U.S. dollar were commodity-based currencies like the Canadian, Australian and New Zealand dollars.

Part of the Canadian dollar weakness was attributed to some U.S. dollar momentum after data pointed to an unexpected rise in U.S. consumer sentiment this month.

The University of Michigan survey showed consumer sentiment improved in early June, beating expectations for an unchanged reading.