Canada Dollar Pares Advance as S&P Places 15 Euro Nations on Credit Review

Canada’s dollar pared gains versus its U.S. counterpart as Standard & Poor’s said it put 15 euro zone countries on watch for a possible credit-rating downgrade, citing a tightening of credit conditions.

The Canadian currency strengthened earlier as investors sought riskier assets amid bets European leaders would make progress finding a solution to the region’s debt crisis. German Chancellor Angela Merkel and French President Nicolas Sarkozy pushed for a rewrite of the European Union’s governing treaties to tighten economic cooperation. The Bank of Canada likely keep interest rates unchanged tomorrow, a Bloomberg survey showed.

“It’s going to be a disappointing day for the Canada bulls going into the Bank of Canada tomorrow,” said Steve Butler, managing director of foreign-exchange trading in Toronto at Bank of Nova Scotia’s Scotia Capital unit. “All these rumors about S&P have taken a big shine off the markets this afternoon.”

The loonie, as Canada’s currency is known for the image of the aquatic bird on the C$1 coin, appreciated 0.3 percent to C$1.0165 per U.S. dollar at 5 p.m. in Toronto. Earlier it gained as much as 0.7 percent. One Canadian dollar buys 98.39 U.S. cents. Canada’s dollar strengthened 2.7 percent last week, the most since the five days ended Oct. 14.

The Canadian dollar gained 0.2 percent versus the euro to C$1.3623.

The S&P 500 Index ended the day up 1 percent after climbing earlier as much as 1.8 percent. Futures on crude oil, Canada’s biggest export, erased earlier gains and traded at $100.62 a barrel in New York, down 0.5 percent.

‘Broader Risk Sentiment’

“Canada’s dollar is trading with broader risk sentiment rather than domestic factors,” said Charles St-Arnaud, a foreign-exchange strategist at Nomura Holdings Inc. in New York.

Germany, France, Netherlands, Austria, Finland and Luxembourg, the euro area’s six AAA rated countries, are among the nations placed on “creditwatch negative,” pending the result of a summit of EU leaders on Dec. 9, S&P said.

Canadian government bonds rose, pushing yields on the benchmark 10-year security down three basis points, or 0.03 percentage point, to 2.09 percent. The price of the 3.25 percent note due in June 2021 increased 25 cents to C$109.98.

The loonie rose earlier versus the greenback as Sarkozy told reporters in Paris today after meeting with Merkel that Europe’s two biggest countries agreed to back automatic penalties for deficit violators, a European monetary fund and monthly summit meetings. Merkel, speaking in Berlin last week, likened solving Europe’s debt crisis to a marathon, shunning investor calls for quick action while pushing for stricter budget enforcement and overhauling the region’s governance.

Geithner in Germany

The EU summit is scheduled to take place in Brussels Dec. 9, U.S. Treasury Secretary Timothy Geithner arrives in Frankfurt tomorrow to prod political leaders, and the European Central Bank has a policy announcement Dec. 8.

Canada’s dollar is turning into a haven for foreign- exchange investors shunning European turmoil and seeking the safety of the U.S. without the budget deficits or political gridlock.

The currency, which underperformed nine major peers in Bloomberg Correlation-Weighted Indexes in the first eight months of the year, has rebounded, topping all except the U.S. dollar and yen since. As the U.S. struggles with a $1.3 trillion budget shortfall, AAA rated Canada may use rising commodity revenue and spending cuts to balance the budget within five years.

Increase Next Year

Bank of Canada Governor Mark Carney will be the only central-bank leader in the Group of 10 countries to raise interest rates next year, according to forecasts compiled by Bloomberg News. Inflation has exceeded the bank’s 2 percent target for 11 months as the economy grows at double the pace of the Group of Seven nations. Canada’s six largest banks say the loonie will gain versus the dollar even as the U.S. economy strengthens.

Carney will raise the Bank of Canada’s policy rate by 25 basis points in the fourth quarter next year to 1.25 percent, according to the weighted average of 21 forecasts compiled by Bloomberg News. He’ll keep it at 1 percent tomorrow, another Bloomberg survey showed.

To contact the reporters on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net; Chris Fournier in Halifax, Nova Scotia, at cfournier3@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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