Canada Dollar Reaches Three-Year High on Rate-Rise Speculation, Bonds Fall

Canada’s dollar appreciated to the strongest in more than three years versus the greenback after statements this week from the Bank of Canada led investors to raise bets interest rates will increase this year.

The loonie, as the currency is commonly called, weakened against the euro for a second day after European leaders enabled their 440-billion euro ($633 million) rescue fund to buy debt across stressed eurozone nations. Crude oil, Canada’s largest source of export revenue, rose for a third day.

“It’s getting harder and harder for the Bank of Canada to justify the low interest rates as inflation starts to creep up higher,” said Aaron Fennell, a futures specialist at Bank of Nova Scotia’s ScotiaMcLeod unit, by phone from Toronto. “At some point, they’re going to have to start raising rates and they may have to raise rates quite a bit before we’re said and done to get to a more normal interest rate. Long-term, you have to be bullish the Canadian dollar.”

The currency rose as much as 0.5 percent to 94.23 cents per U.S. dollar, the strongest level since Nov. 9 2007, and traded at 94.28 cents at 5 p.m. in Toronto. It ended yesterday at 94.74 cents. One Canadian dollar buys $1.0602.

The seven-day relative strength index of the Canadian dollar versus its U.S. counterpart rose to 71. Readings above 70 indicate a currency’s advance may be difficult to sustain.

Crude oil futures gained 1.2 percent to $99.31 a barrel in New York.

European Discussions

European leaders met in Brussels seeking solutions for their 21-month sovereign debt crisis.

French President Nicolas Sarkozy reiterated support for the euro after the summit closed, saying it’s an “irreplaceable” achievement of Europe. He said a bailout fund will operate in secondary markets. Greece will receive additional aid of 109 billion euros ($157 billion), according to the European Union.

Spooked by a bond market selloff last week, leaders empowered their 440-billion euro rescue fund to buy debt across stressed euro nations after eight hours of talks in Brussels. The fund can also aid troubled banks and offer credit-lines to repel speculators. Leaders pledged a 160 billion euro aid package for Greece, eased the terms of its existing loans and cajoled bondholders into footing part of the bill.

The fund can also aid troubled banks and offer credit-lines to repel speculators. Leaders pledged a 160 billion euro aid package for Greece, eased the terms of its existing loans and cajoled bondholders into footing part of the bill.

“All eyes are on euro and what’s going on over there and their discussions,” C.J. Gavsie, managing director for foreign exchange trading at Bank of Montreal, said by phone from Toronto.

Bonds Fall

Canadian government bonds fell, pushing the yield on benchmark 10-year bonds six basis points higher to 3 percent. The price of the 3.25 percent security due in June 2021 fell 51 cents to C$102.14.

Consumer prices advanced 3.6 percent in June from a year earlier, after a 3.7 percent gain in May, Statistics Canada may report tomorrow in Ottawa, according to the median forecast of 24 economists in a Bloomberg News survey.

The Bank of Canada on July 19 kept its benchmark policy rate at 1 percent and said borrowing costs will rise, omitting the word “eventually,” which had appeared in previous statements. The bank also raised its forecast for inflation.

“To the extent that the expansion continues and the current material excess supply in the economy is gradually absorbed, some of the considerable monetary policy stimulus currently in place will be withdrawn,” Bank of Canada Governor Mark Carney said in remarks at a press conference yesterday.

The loonie has weakened 1.2 percent this year versus the currencies of nine other developed nations, according to Bloomberg Correlation-Weighted Currency Indexes.

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