TORONTO: The Canadian dollar strengthened to above parity with its US counterpart on Thursday for the first time this year as weak US economic data and Wednesday's move by the Federal Reserve to keep rates low until 2014 drove down the US dollar.
The Canadian currency reached its highest point in nearly three months after the US central bank said it would likely keep interest rates near zero until late 2014 and Fed Chairman Ben Bernanke opened the door to further stimulus measures.
"Risk appetite got another big boost yesterday in the Fed's clear desire to keep things as loose as possible," said Mark Chandler, head of Canadian fixed income and currency strategy at Royal Bank of Canada.
Commodity-linked currencies like Canada's have risen along with investor hunger for riskier assets since the start of the year, helped by the prospect that major central banks would keep monetary policy easy to spur global growth.
US jobless data on Thursday added to expectations the US Federal Reserve will keep policy easy for a long time, as weekly claims rose to 377,000, above a consensus forecast for 370,000.
The Canadian dollar breached parity with the greenback for the first time since Nov. 1 early Thursday, rising as high as C$0.9981 to the US dollar, or $1.0019. On Wednesday, the currency finished at C$1.0035 to the US dollar, or 99.65 US cents.
In response to the Fed's rate-freeze extension, BMO Capital Markets predicted the Bank of Canada would likely keep its own rates on hold until late 2013, pushing back its forecast by six months.
However, Chandler said the Bank of Canada was unlikely to lower its rate from 1 percent to be more in line with near-zero US rates, reflecting Canada's stronger economic fundamentals. Higher rates tend to help currencies strengthen by attracting international capital flows.
"Our unemployment rate is 7.5 percent, if we measured it in US terms it would be about 6.5 percent and that would be very close to where they (Fed) see the unemployment rate two years from now," said Chandler.
But analysts saw limits on the Canadian dollar's near-term gains. The currency's rally sparked increased buying of the greenback and selling of Canadian dollars by the corporate sector, said C.J. Gavsie, managing director of foreign exchange sales at BMO Capital Markets.
The currency will likely trade around parity over the next week or two, meeting resistance near the 200-day moving average at C$0.9949 said Gavsie, adding that pressures from Europe may also halt its momentum.
"As we do see some concern over the rest of Europe, outside of the Greek story, some of the risk-off aspects will come back into play and we will see some US dollar strength," he said.
Market focus stayed on Greek debt on Thursday. Talks on a debt swap deal with the country's private creditors resumed as the clock ticks down to a March deadline, when Greece faces major bond redemptions.
Canadian government bond prices were mostly higher, with the two-year bond up a Canadian cent to yield 1.015 percent. The 10-year bond rose 11 Canadian cents to yield 2.031 percent.
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