TORONTO: After hitting its weakest level against the greenback in 21 months on Monday, the Canadian dollar pared some losses in afternoon trade after US Federal Reserve officials downplayed market fears of an imminent end to Fed stimulus measures.
Two Fed officials, Narayana Kocherlakota and Richard Fisher, said the central bank's policy still will be accommodative even if it scales back its monthly bond buying.
"They haven't put a definite timeline as to when the Fed's going to begin tapering, like it could be years out," said David Bradley, director of foreign exchange trading at Scotiabank.
The comments appeared to assuage skittish investors who have fled US bonds and the stock market and bid up the value of the US currency since Fed Chairman Ben Bernanke said last week the bond-buying program could end by mid-2014.
The Canadian dollar, which underperformed most other major currencies on Monday, ended the session at C$1.0486 versus the US dollar, or 95.37 US cents.
The currency at one point hit C$1.0556, its weakest level since Oct. 5, 2011, after finishing on Friday at C$1.0456, or 95.64 US cents.
Scotiabank's Bradley said the longer-term trend remained US dollar strength and relative Canadian dollar weakness, and that C$1.10 was a plausible target if US 10-year yields breach 3 percent.
"I don't think there's going to be a lot of resistance between current levels and C$1.0650 should all the other trends remain intact," he said.
10-year Treasuries are yielding more than 2.5 percent, having spiked from around 1.6 percent in early May.
Canadian government debt prices mirrored the US, with the two-year bond shedding 2.5 Canadian cents to yield 1.251 percent. The benchmark 10-year bond lost 36 Canadian cents to yield 2.489 percent, just off its highest yield since early August 2011.
"We're driven by the US dollar right now, and as US yields continue to march higher you're going to see continued US dollar strength. That's probably going to be across the board," said Benjamin Reitzes, senior economist and foreign exchange strategist at BMO Capital Markets.
"It's probably going to be a tough go for Canada for a while yet. This upward cycle in yields probably, at least for the near term, isn't done yet."
Reitzes said BMO was expecting the Canadian dollar to weaken through to early next year on US dollar strength and a more robust US economic performance.
There is little domestic news expected to drive the Canadian currency until Friday's release of economic growth data for April.
"We're a tad below consensus, looking for an unchanged number. And last week's soft CPI (consumer price index) number (is) just another reason for nothing new to come out of Bank of Canada and no reason for them to tighten policy, to provide any support for the dollar," Reitzes said.
Data on Friday showed that a jump in natural gas prices raised Canada's annual rate of inflation to 0.7 percent in May from a 3-1/2-year low of 0.4 percent, but the figure remained well below the central bank's target, confirming there is little pressure to raise interest rates soon.
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