Canada’s dollar weakened the most this month versus its U.S. counterpart after the Bank of Canada cut its economic growth outlook and removed a reference to withdrawing stimulus as the global economy slows. The country’s economy may take longer to return to its capacity level as a debt crisis triggers a “brief” European recession and slow U.S. growth reduces demand for exports, the Ottawa-based central bank said in a statement. The loonie, as the currency is nicknamed, extended declines after a meeting of European Union finance ministers was cancelled. “At the moment, there’s more concern than there is clarity,” said David Watt, senior currency strategist at Royal Bank of Canada’s RBC Capital Markets unit, by phone from Toronto, referring to what’s happening in Europe. “We need to see whether the ring fence is going to be high enough to keep European Union stresses contained. The Bank of Canada was decidedly more cautious than I anticipated.” Canada’s currency fell as much as 1.8 percent to C$1.0179 per U.S. dollar, the most since Sept. 22, and traded at 1.0146 at 10:47 a.m. in Toronto. It rose as much as 0.5 percent beyond parity, the first time it traded above that level since Sept. 21. One Canadian dollar buys 98.56 U.S. cents. ‘Little Rich’ “Parity may be a little rich for the Canadian dollar in this environment,” said RBC’s Watt. He forecast the currency to end the year at C$1.04. The Bank of Canada held its policy interest rate at 1 percent and said slow U.S. growth will hurt consumer and business confidence. The rate action was forecast by all 27 economists surveyed by Bloomberg News. Inflation will also be slower than earlier forecast, falling to as low as 1 percent next year, it said. “Obviously, the bank is citing more slowdowns and erring on the cautionary side,” said John Curran, senior vice president at the online foreign exchange dealer CanadianForex Ltd. in a telephone interview. “They’re looking for slower growth. The market had been anticipating a bit more positive sentiment on the economic outlook and that didn’t happen. That’s why the Canadian dollar is falling.” Shorter-term government bonds rose, driving yields on benchmark two-year debt nine basis points lower to 1.01 percent. Yields reached a record low 0.76 percent on Sept. 12. One basis point is 0.01 percentage point. Bond Sale Canada will provide details of its three-year bond offering on Oct. 27. The auction is scheduled for Nov. 2. The loonie traded through par with the greenback earlier as European officials worked to forge a plan that contains the region’s debt crisis. Summits of the 27 European Union leaders and 17 leaders of the euro area will take place tomorrow in Brussels as scheduled, EU President Herman Van Rompuy’s office said. A separate meeting of EU finance ministers was canceled. The Bank of Canada has held the overnight rate at 1 percent since September last year, after raising it from a record low 0.25 percent in June of that year. In a Bloomberg survey of 21 economists earlier this month, 19 predicted the central bank’s governor Mark Carney will keep interest rates unchanged at 1 percent through the year, with two predicting a cut. Interest rates will likely remain unchanged until the third quarter of next year, when Carney will begin raising borrowing costs again, according to the survey’s median estimate. Futures Bets Futures markets showed traders are reducing bets that the Bank of Canada will increase interest rates by the first quarter next year. Yields on the March 2012 bankers’ acceptances contract, a proxy for short-term borrowing expectations, dropped 11 basis points to 1.08 percent. The central bank will release its monetary policy report tomorrow, updating its forecasts for the country’s economy that were last revised July 20. “Tomorrow, the MPR report will give us details of what the Bank of Canada expects going forward and how they view the surprising uptrend in inflation across the G-4 -- the U.S., Canada, Europe and UK -- and still trending higher,” said Camilla Sutton, head of currency strategy at Bank of Nova Scotia in Toronto, in a telephone interview. “It’s one of the pieces of the puzzle and does complicate the roll of monetary policy going forward.” Retail sales increased 0.5 percent in August to a seasonally adjusted C$37.8 billion ($37.8 billion) compared with July, Statistics Canada said in Ottawa. Economists surveyed by Bloomberg News predicted a 0.3 percent gain, according to the median of 22 responses. The loonie has weakened 2.3 percent in the past month, according to Bloomberg Correlation-Weighted Currency Indexes, a gauge of 10 developed-nation currencies. The greenback has declined 3.6 percent, and the yen has lost 2.6 percent of its value. To contact the reporter on this story: Chris Fournier in Halifax, Nova Scotia at cfournier3@bloomberg.net To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

Source