Weak greenback boosts loonie as Bank of Canada leaves interest rate unchanged

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Malcolm Morrison, The Canadian Press, On Tuesday May 31, 2011, 9:17 am
By Malcolm Morrison, The Canadian Press

TORONTO - The Canadian dollar advanced Tuesday as the Bank of Canada announced it will leave its key interest rate unchanged at one per cent.

The dollar was up 0.84 of a cent to 103.18 cents US as the U.S. currency weakened amid rising optimism about Greece's debt woes.

The central bank acknowledged that the economy faces rising inflationary pressures from high energy prices and changes in provincial indirect taxes.

But at the same time, the economy is also dealing with a U.S. economy that is only growing at a modest pace while growth in Europe is maintaining momentum, although the risks related to peripheral economies such as Greece have increased.

It added that a resumption of rate hikes would only follow "careful consideration." Economists don't expect the bank to raise rates until this fall at the earliest.

The greenback weakened after the Wall Street Journal reported that Germany may consider abandoning a push to reschedule Greek debt early. Such a move could make it easier for Greece to receive a new package of financial aid.

Other reports said that European officials were preparing new support measures for Greece.

A top European Central Bank official was quoted by the Financial Times on Monday as saying Greece could get another euro20 billion (US$28 billion) in aid from its fellow euro countries and raise three times that through new austerity measures such as selling government property.

"More aid for Greece does not solve the problem, but it does buy time and limit contagion risk into Ireland, another country with funding requirements in 2012," observed Scotia Capital chief currency strategist Camilla Sutton.

The weakening U.S. dollar helped push oil prices above US$103 a barrel Tuesday with the July crude contract on the New York Mercantile Exchange up $2.69 to US$103.28 a barrel.

When the dollar weakens, it makes oil cheaper for investors holding other currencies and usually boosts prices.

Bullion prices were little changed with the June gold contract up 50 cents to US$1,536.80 while the July copper contract in New York was up two cents at US$4.20 a pound.