TORONTO: The Canadian dollar lost a full cent in value against the US dollar on Thursday as investors piled into the US currency a day after the US Federal Reserve pointed to an eventual end of its unprecedented economic stimulus program.
The currency hit its lowest point versus the greenback since late May, and fell to its lowest level against the euro since late 2011 on its second straight day of major declines.
The Fed's signal on Wednesday that the end of its massive monthly bond-buying program is in sight led to a spike in bond yields and a sharp retraction in global equity markets. The prospect of an eventual tightening of US monetary policy was good for the greenback's valuation, however.
The loonie, as Canada's currency is colloquially known, initially outperformed a string of major currencies, but later succumbed to heavy selling pressure.
"Canada really is just playing a little bit of catch-up with some of the other majors that have lost considerable ground," said Don Mikolich, executive director of foreign exchange sales at CIBC World Markets.
Fed Chairman Ben Bernanke said the US central bank could soon slow its bond-buying program and end it by the middle of 2014.
That pushed yields on Canadian government debt to 18-month highs, following US Treasuries higher as investors exited the safe haven assets and seemingly moved en masse into the US currency.
Traders were wary of predicting a ceiling for the yield spike, as implementation of the Fed's stimulus-slowing measures will likely keep pressure on bonds, especially at the longer end of the curve.
"The upcoming challenge will be to see what true yields will look like in the 10s (10-year US Treasuries)," Mikolich said.
In addition to the Fed news, global stock markets were hit by Chinese data that suggested waning growth, which also yanked commodity prices and the currencies of major resource exporters lower.
The Australian and New Zealand dollars were particularly hard hit, while the loonie was protected in part by its proximity to an improving US economy. The Aussie hit its weakest level against the loonie since September 2010.
"The Canadian dollar may suffer a little bit less than some of its commodity currency cousins ... but nevertheless a stronger US economy, while it's good for the Canadian economy, it's obviously better for the US economy," said Greg Moore, a currency strategist at TD Securities.
Housing and factory data out of the United States on Thursday reinforced the view of a recovery in the world's largest economy.
The Canadian dollar ended the session at C$1.0373 to the greenback, or 96.40 US cents, compared with C$1.0273, or 97.34 US cents, at Wednesday's North American close.
The 0.9 percent slip was the currency's biggest one-day drop since May 22.
The global selloff overshadowed data on Thursday that showed household debt in Canada, relative to income, fell for the second straight quarter.
The Bank of Canada has previously voiced concern about high levels of consumer debt, but lately seems more confident this is now under control.
Canada's two-year bond fell 4 Canadian cents to yield 1.189 percent, while the benchmark 10-year bond fell 62 Canadian cents to yield 2.327 percent, its highest yield since late in 2011.
Canadian inflation and retail sales data is due out on Friday.
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