C$ hits weakest level since Jan on Fed decision

TORONTO: The Canadian dollar sank past parity with its US counterpart to its weakest level since January on Wednesday after the Federal Reserve ramped up efforts to aid the beleaguered US economy.

The Fed embraced further monetary easing by extending the average maturity of its security holdings, announcing it intends to buy $400 billion in 6- to 30-year Treasuries by the end of June 2012.

The effort, designed to put more downward pressure on long-term interest rates and help the battered US housing sector, boosted the US dollar and catapulted long-dated US bond prices.

"The US dollar is a buy on the news, from a safe-haven perspective. Ironically speaking, when the Fed sees 'significant downside risk' to its economic outlook and chooses to deliver Operation Twist, even with three dissenters, the market maintains its position -- as it always does -- to buy US Treasuries and by extension the US dollar," said Jack Spitz, managing director of foreign exchange at National Bank Financial.

"Risk currencies are all off, even more than they were before the Fed announcement, led by the New Zealand dollar, which is down 2 percent. All risk-proxy currencies, whether it is Canada, Norway, Aussie, Sweden, are all trading down well in excess of 1 percent against the US dollar today."

At 3:09 p.m. (1828 GMT), the Canadian dollar stood at C$1.0031 to the US dollar, or 99.69 US cents, just off the session lows of C$1.0038 to the US dollar, or 99.62 US cents. That was the weakest reading for the Canadian currency since Jan. 31 and well off Tuesday's North American close of C$0.9936 to the US dollar, or $1.0064.

US stocks fell and benchmark Treasury yields dropped to their lowest in more than 60 years after the Federal Reserve announced the program. The US dollar rose broadly.

Earlier in the session, Canadian data showed the annual inflation rate climbed to a higher than expected 3.1 percent in August, but analysts this was unlikely to worry the Bank of Canada, which is more concerned with fiscal problems in Europe and the United States.

Market operators had expected the overall rate to rise to 2.9 percent from the 2.7 percent recorded in July.

The Canadian dollar had briefly strengthened as the inflation report cooled some market speculation that the Bank of Canada would cut interest rates.

The Fed announcement boosted long-dated US Treasuries because the policy means the central bank will sell shorter-term notes and use those funds to buy longer-dated bonds.

Canadian long-term debt prices soared in concert.

The two-year bond was down 3.5 Canadian cents to yield 0.958 percent, while the 10-year bond climbed 32 Canadian cents to yield 2.162 percent.

Copyright Reuters, 2011