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Canadian Dollar Approaches 3-Year Low as Fed Bets Drive Sell-Off

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Canadian Dollar Approaches 3-Year Low as Fed Bets Drive Sell-Off

The Canadian dollar edged closer to three-year lows amid speculation the United States Federal Reserve could initiate its first bond taper later this week. The loonie has been mired in negative speculation since the Bank of Canada was forced to slash its growth forecast several months ago.

The loonie declined against the majority of its major peers just two days before the Federal Open Market Committee coalesces in Washington to discuss monetary policy. The Fed has pumped nearly $4 trillion into the US financial markets since November 2009; the latest round of easing, dubbed QE3, has been injecting $85 billion per month into the markets since September 2012. Record stimulus has devalued the US dollar, so plans to begin paring asset purchases raise expectations about interest rate hikes, which supports the American currency.

For its part, the Bank of Canada has reassured investors an asset taper south of the border is a signal the US economy is back on track, a trend that supports the export-driven Canadian economy. The United States accounts for more than three-quarters of Canada’s trade portfolio.

“While the Fed is talking about lessening the amount of stimulus, [BOC Governor Stephen] Poloz has indicated there’s uncertainty and that’s affected the perception of the Canadian dollar,” said David Watt of HSBC Holding Plc. This means “the Canadian dollar is still going to lag” even when risk sentiment is positive.

The loonie managed to hold its ground against the US dollar, which was unable to rally on data showing industrial production rose to a one-year high. The USDCAD pair was virtually unchanged at 1.0589. The pair has gained more than 7 percent in 2013.

Statistics Canada will report on consumer inflation and retail sales later in the week.

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