TORONTO: The Canadian dollar firmed modestly against the greenback on Thursday as investors reassessed their expectations for how long the Federal Reserve will keep its stimulus in place the day after the Fed held policy steady, defying market expectations.
The US central bank maintained its $85 billion a month in bond purchases in a decision on Wednesday, surprising investors who had largely expected a small reduction of about $10 billion.
The central bank also cut its projections for economic growth for both this year and next.
The surprise move saw the US dollar hovering around seven-month lows on Thursday, and the Canadian dollar strengthen to as much as C$1.0182 in early trading, a fresh three-month high.
But with the United States as Canada's biggest trading partner, the lower economic forecast could dampen some investor enthusiasm for the loonie.
"The flip side for the Canadian dollar is that our economic recovery is highly tied to the US, so a more downbeat forecast on future economic growth from the Fed isn't really a good thing for the Canadian economy," said Scott Smith, senior market analyst at Cambridge Mercantile Group in Calgary.
"We're in this range where investors and traders are really trying to decipher whether or not this gives us impetus to take another leg lower from here or if we have to stand back and reassess the situation."
The Canadian dollar firmed to C$1.0216 to the US dollar, or 97.89 US cents, stronger than Wednesday's session close of C$1.0222, or 97.83 US cents.
Reaction to Thursday's domestic economic data was muted as a stronger-than-expected 1.5 percent rise in wholesale trade in July was offset by a downward revision to the previous month's figures.
Prices for Canadian government bonds were mixed across the maturity curve, with the two-year bond up 3 Canadian cents to yield 1.249 percent, and the benchmark 10-year bond rising 2 Canadian cents to yield 2.683 percent.
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