Canadian Dollar Rallies on Interest Rate Increase

By David George-Cosh Features Dow Jones Newswires

The Canadian dollar rallied to a 10-month high against the U.S. dollar Wednesday after the Bank of Canada raised interest rates for the first time in seven years.

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Following the central bank's announcement, the U.S. dollar was trading around C$1.2835, down from C$1.2910 right before the decision, according to data provider CQG.

The loonie, as the Canadian currency is commonly called due to the loon on its single-dollar coin, has moved up by about 6 cents against its U.S. counterpart since hitting year-to-date lows in early May after positive economic indicators sent strong signals that the central bank was likely to make a move on its overnight policy rate.

Analysts say more hikes are expected, with market odds betting on one more rate increase by the end of the year.

"The Bank of Canada has sent a strong signal that another rate hike is likely," said John Curran, managing director at Bendix Foreign Exchange in Toronto. "While the loonie has strengthened in the short term, I believe it's going to top out around these levels."

While the Bank of Canada has highlighted that future economic data will play a key part in its monetary policy decisions, Mr. Curran also noted that oil prices will continue to be a key driver of the loonie.

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The higher currency may impact Canadian exporters who have benefited from a weak Canadian dollar over the past several years. However, any strength in the currency may compel manufacturers to import expensive machinery, offsetting any revenue lost from lower sales, said Dennis Darby, president of the Canadian Manufacturers and Exporters.

"The overall impact to our exporters may be small," Mr. Darby said in a recent interview. "It might be anywhere for 12 to 18 months for a rate change to have an effect on economic activity."

Write to David George-Cosh at david.george-cosh@wsj.com

(END) Dow Jones Newswires

July 12, 2017 11:18 ET (15:18 GMT)