NEWS / Central Banks

Canadian dollar drops, bonds ease as rates mulled

TORONTO - The Canadian dollar fell hard against a stronger U.S. currency on Thursday, giving back the previous day's gains as market players mulled an uncertain Bank of Canada interest rate outlook.

Bond prices retreated roughly in line with U.S. treasuries.

The currency finished at C$1.1189 to the U.S. dollar, or 89.37 U.S. cents, down from C$1.1092 to the U.S. dollar, or 90.16 U.S. cents, at Wednesday's close.

A string of robust economic reports has shifted market expectations toward continued monetary tightening by the Bank of Canada.

But comments on Wednesday by Governor David Dodge, suggesting that an eighth-straight rate hike is not a sure thing, sparked a late day selloff that continued on Thursday.

"(The weakness) is on the back of the interpretation of Dodge's comments, which could be taken in a multitude of ways," said Ted Gould, a trader at investors Bank & Trust in Boston.

Dodge noted month-to-month indicators tend to be volatile, and said the bank makes its rate decisions with an eye to conditions 12 to 24 months down the road.

This pulled the Canadian dollar lower, and prompted traders who had bet against the U.S. dollar to cover their losses, driving the Canadian currency to the bottom end of the range it has occupied over the past two months.

The decline was accelerated by broad selling of emerging and high yielding currencies in favor of the greenback as a hedge against volatile markets.

The shift in Canadian rate sentiment has come suddenly, as signs of strength in jobs growth, retail spending and inflation have wiped out memories of the Bank of Canada's recent suggestions that it was likely finished raising rates.

Many economists have changed their tune over the past week, with some now expecting two more rate hikes, particularly as U.S. rates seem set to continue rising.