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Canadian dollar falls after Bank of Canada rate hike

Blog by Shaun Kimmins | June 1st, 2010

TORONTO (Reuters) - The Canadian dollar fell against the U.S. dollar on Tuesday morning after the Bank of Canada became the first Group of Seven central bank to raise interest rates since the financial crisis began.

The quarter-percentage point rate hike, which the market expected, brought the bank's key overnight rate to 0.50 percent, but the bank gave no indication of whether it would follow up with more rate increases.

At 9:25 a.m., the currency was at C$1.0534 to the U.S. dollar, or 94.93 U.S. cents, compared with Monday's close at C$1.0435 to the U.S. dollar, or 95.83 U.S. cents.

"They delivered the goods on the current hike but kept markets guessing on their next moves," said Derek Holt, economist at Scotia Capital.

"That lack of clarity on the bias has the (Canadian dollar) retreating a bit."

The Canadian dollar fell as low as C$1.0544 to the U.S. dollar, or 94.84 U.S. cents, from about C$1.0491 to the U.S. dollar, or 95.32 U.S. cents, shortly before the rate announcement.

The Canadian dollar was already weaker ahead of the rate decision, weighed by a global rise in risk aversion on concern about the euro zone's growth outlook.

Given the risk aversion and uncertainty about the Bank of Canada's path on interest rates, Canadian bond prices were higher across the yield curve.

The two-year Canadian government bond jumped 33 Canadian cents to yield 1.692 percent, and the 10-year bond gained 62 Canadian cents to yield 3.281 percent.

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