Loonie gets hit after Bank of Canada cuts rates, signals more
The U.S. dollar rallied against its major rivals Tuesday after deepening cracks in the British banking system sent the pound to a seven-year low and heightened the safe-haven lure of the greenback.
The U.S. dollar also got a leg up on its Canadian rival after the Bank of Canada cut its benchmark overnight target rate by a half percentage point to a record low of 1%.
The pound slipped below the key $1.40 level for the first time since 2001 and was last buying $1.3972, or 2.9% less than on Monday. An earlier plunge to $1.3937 marked a even-year low, according to CMC Markets.
The euro fetched $1.2919, or 1.1% less.
More broadly, the dollar index edged up 0.2% to 86.117 as financial markets awaited the inauguration of Barack Obama as the 44th president of the United States. See full story on Obama.
"Ongoing concerns about the global economic and financial environment are weighing on the currencies with the dollar providing a save harbor in a very nasty storm," said Marc Chandler, global head of currency strategy at Brown Brothers Harriman, in emailed commentary.
Among the major currencies, only the Japanese yen gained against the U.S. dollar. The greenback bought 90.11 yen, down 0.5% from Monday.
Canada cuts
The U.S. dollar also gained against the loonie after the Bank of Canada made an widely expected cut to interest rates but signaled it may draw down those benchmark rates even lower.
Canada's central bank gave a gloomy assessment of the country's outlook, saying that the global economic outlook has deteriorated since December and that the Canadian economy is now in recession.
The bank projected that Canada's economy will contract through mid-2009, with real GDP dropping by 1.2% this year on an annual average basis.
The BOC also left the door open to further rate cuts, analysts said, as it noted it would "continue to monitor carefully economic and financial developments in judging to what extent further monetary stimulus will be required."
The Canadian dollar initially rallied on the statement and then fell as traders digested the grimmer outlook.
"Leaving aside the modest bout of profit-taking following the decision this morning, the loonie is expected to remain under selling pressure on softening economic fundamentals and falling crude oil prices," said Michael Woolfolk, senior currency strategist at the Bank of New York.
The U.S. dollar bought C$1.2609, or 0.4% more than Monday.
More British bank woes
The pound on Tuesday extended a slump triggered the prior day by the British government's decision to expand last fall's bank bailout plan and take a larger stake in loss-ridden Royal Bank of Scotland.
Traders Tuesday hammered shares in Lloyds Banking Group and other U.K. bank stocks, betting that the British government would be forced to take over more banks to prevent large failures.
The pound hit an all-time low vs. the Japanese currency and last bought 125.83 yen, down nearly 4%. The euro gained 2.4% against sterling, buying 92.7 pence.
"I think there's a lot of worry about whether the United Kingdom will be able to attract the financing it needs," said Stephen Gallo, head of market analysis at Schneider Foreign Exchange.
