TORONTO: The Canadian dollar languished at a 1-1/2-month low on Friday after this week's policy shift by the country's central bank led investors to believe interest rates will stay where they are for longer than had been anticipated.
Highlighting weaker-than-expected growth and inflation, the Bank of Canada on Wednesday dropped any mention of eventual rate increases from its latest policy statement, after more than a year of warning that rates will one day have to rise.
The central bank has kept rates at 1 percent since 2010, and analysts said the removal of the Bank of Canada's rate-rise bias represented a more neutral tone for policy.
Analysts had until recently largely expected the Bank would resume raising rates at the end of next year. A Reuters poll showed Canada's primary dealers now expect the Bank of Canada to maintain rates at 1 percent well into 2015.
The loonie will likely trade as weak as C$1.07 by the end of the year, said Mark Chandler, head of Canadian fixed income and currency strategy at Royal Bank of Canada, though delayed expectations of when the Federal Reserve will start to reduce its economic stimulus could soften the decline.
"We had thought that (level) could happen by the end of this year. It's possible it might spill into the new year with the shifting in the taper timetable in the US," said Chandler.
The Canadian dollar was at C$1.0445 versus the greenback, or 95.74 US cents, weaker than Thursday's close of C$1.0425, or 95.92 US cents. The Canadian currency hit a session low of C$1.0456, the lowest level since early September.
Investors will get more insight into what the Fed might do when the central bank meets next week. The Fed surprised markets in September with its decision to hold the pace of its $85 billion a month in bond purchases steady, rather than trimming the amount as had been expected.
The loonie touched a three-month high following the September Fed announcement but has weakened since. Analysts see the Canadian dollar benefiting from any delay in the Fed's withdrawal from quantitative easing as the currency should attract some risk appetite.
Canadian government bond prices were mixed across the maturity curve. The two-year bond was up 4-1/2 Canadian cents to yield 1.076 percent, while the benchmark 10-year bond was off 2 Canadian cents to yield 2.429 percent.
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