TORONTO: Canada's dollar climbed to an 11-week high against the US dollar on Monday as expectations rose that the European Central Bank and the US Federal Reserve will provide stimulus to support their respective struggling economies.
US Treasury Secretary Timothy Geithner and Germany's Finance Minister Wolfgang Schaeuble issued a joint statement after their meeting on Monday that emphasized "the need for policymakers to adopt and implement all reform steps required to deal with the financial crisis and crisis of confidence."
That sent broader equity markets higher, adding to the positive from last week when ECB President Mario Draghi's pledge on Thursday to do whatever is necessary to protect the euro zone from collapse.
"There's some optimism that is being built into market right now. That optimism typically will equate to weakness in the US dollar," said Jack Spitz, managing director of foreign exchange at National Bank.
"So the Canadian dollar should do better from a value proposition when economic times or the perception of economic times is improving," he added.
The Canadian dollar ended at C$1.0018 against the greenback, or 99.82 US cents, slightly firmer than Friday's North American session close at C$1.0044, or 99.56 US cents.
The rhetoric raised expectations that the ECB could take bold measures. But some investors doubt that ECB policymakers will deliver in line with market expectations when they meet on Thursday, and with September shaping up to be a "make-or-break" month in the search for a resolution to the three-year-old euro zone debt crisis.
"I think we go into the ECB meeting with the market having quite elevated expectations that the ECB may do something," said Adam Cole, global head of FX strategy at RBC Capital Markets in London.
"On balance, I think if anything, there's probably scope for disappointment as the ECB rarely puts together policy in a hasty fashion at the best of times, and now, in particular there seems to be little incentive for them to do that."
The euro fell on Monday, hitting a record low against the Australian dollar, amid worries the ECB may disappoint investors hoping for more actions to contain the euro zone's debt crisis.
The US Federal Reserve also holds a policy meeting on Tuesday and Wednesday. Speculation is growing that the Fed will do more to bolster recovery, after data showed US second-quarter gross domestic product expanded at a 1.5 percent annual rate, the weakest pace of growth since the third quarter of 2011.
US non-farm payrolls data on Friday is expected to provide markets with further direction.
"Until we get to some of these big event risks on Wednesday, Thursday, Friday, the momentum still seems to be downward for dollar/Canada," added RBC's Cole. "(I) wouldn't be surprised if we did continue to tick down ... possibly through parity in the early part of the week."
He cautioned, however, that any disappointing policy announcements from the two major central banks or a soft US jobs number would threaten the Canadian dollar's recent rally.
Spitz also said thinner volumes could be exaggerating Canadian dollar moves.
"The overall volume of business has been thinned out today recognizing not only the Olympic coverage, but the veritable plethora of event and data that will be coming up this week," he said, noting the currency will likely trade in a tight range of C$0.9980 to C$1.01 against the greenback.
Canadian bond prices edged higher across the curve with the two-year bond up 3 Canadian cents to yield 1.097 percent, and the benchmark 10-year bond up 45 Canadian cents to yield 1.700 percent.
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