Loonie Falls as Bernanke Raises U.S. Economic Recovery Concern

Canada’s dollar declined for the first time in three days after Federal Reserve Chairman Ben S. Bernanke said the economic outlook in the U.S., the nation’s largest trading partner, is “unusually uncertain.”

The currency, nicknamed the loonie for the image of the aquatic bird on the one-dollar coin, erased an earlier gain as Bernanke’s comments raised concern about the consequence of a U.S. economic slowdown, spurring demand for the safety of the greenback and the yen. The Bank of Canada will release its monetary policy report tomorrow.

“It’s a bit of a kneejerk reaction bringing us back to reality,” said Sacha Tihanyi, a currency strategist in Toronto at Bank of Nova Scotia’s Scotia Capital unit. “The Canadian currency is going to get hit a little bit as people express more caution.”

The loonie dropped 0.5 percent to C$1.0491 per U.S. dollar at 5 p.m. in Toronto, compared with C$1.0436 yesterday. One Canadian dollar buys 95.32 U.S. cents.

The Bank of Canada raised the benchmark interest rate yesterday to 0.75 percent, the second increase in less than two months. It also cut the nation’s growth forecast to 3.5 percent from 3.7 percent for this year and to 2.9 percent from 3.1 percent for 2011 and said further action will be “weighed carefully against domestic and global economic developments,” according to a statement from the Ottawa-based bank.

The Canadian dollar fell 1.1 percent to 82.97 yen today. Japan’s currency strengthened against all 16 of its most-traded counterparts as investors sought a refuge from slower growth.

‘Further Policy Actions’

The Fed chairman, in his semiannual report on monetary policy to the U.S. Senate Banking Committee, said “the economic outlook remains unusually uncertain.” Policy makers are prepared “to take further policy actions as needed,” he said, even as they prepared to eventually raise interest rates from almost zero and shrink a record balance sheet.

U.S. policy makers trimmed growth forecasts for this year and next at the Federal Open Market Committee’s June meeting, according to minutes released July 14.

“As much as this impacts the outlook on U.S. growth, I don’t think anything has really changed,” Bank of Nova Scotia’s Tihanyi said.

The Bank of Canada’s decision to raise interest rates yesterday had greater influence on the Canadian dollar, he said.

The Fed has held the key U.S. interest rate at a record low range of zero to 0.25 percent since December 2008, while the Canadian central bank has widened the rate differential to at least a half-percentage point with the two rate increases.

Canada’s government bonds rose, pushing the yield on the 10-year note down four basis points, or 0.04 percentage point, to 3.16 percent.

Retail sales in Canada increased 0.4 percent in May after falling 1.2 percent the previous month, according to the median forecast in a Bloomberg News survey before Statistics Canada releases the data tomorrow.

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