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Canada Dollar Weakens Amid IMF Call to Maintain Interest Rates

The Canadian dollar weakened to the lowest level in more than a week versus its U.S. peer as the International Monetary Fund said the Bank of Canada should refrain from raising interest rates until the end of next year to help fuel growth.

Canada’s currency declined against the majority of its 16 most-traded counterparts as negotiations in Washington over the so-called fiscal cliff of tax increases and spending cuts set to start in January remained unresolved. The Canadian dollar weakened for a second day versus the greenback after a technical measure indicated its recent rally may have been too far, too fast.

“The economy seems to be slowing,” Shaun Osborne, chief currency strategist at Toronto-Dominion Bank’s TD Securities unit, said in a telephone interview from Toronto. “We think Bank of Canada rate hikes are going to get pushed back deeper into 2013. Interest-rate support is unlikely to pick up and that’s probably going to keep the Canadian dollar defensive in early part of next year.”

The loonie, as the Canadian currency is known for the image of the aquatic bird on the C$1 coin, declined 0.3 percent to 98.86 cents at 5 p.m. in Toronto. It touched 98.88, the weakest level since Dec. 10, and breached the 100-day moving average. One Canadian dollar buys $1.0115.

Canada’s dollar has gained 0.6 percent this month to trim its quarterly decline to 0.5 percent.

Canadian government bonds fell, pushing the yield on the benchmark 10-year note up one basis point, or 0.01 percentage point, to 1.85 percent. The price of the 2.75 percent notes maturing in June 2022 declined 6 cents to C$107.82.

Relative Strength

Canada’s dollar has weakened after closing at its strongest level in two months on Dec. 17. That day the 14-day relative strength index versus the dollar touched 33, approaching the level of 30 that indicates a currency may have strengthened too rapidly and is due for a reversal.

Canada’s dollar is “consolidating in the general trend lower than we’ve seen in the last little while,” Osborne said. “Valuation concerns are probably starting to come through.”

The IMF also recommended that Canada use regulation to stem a further build up of household debt. The ratio of Canadian household debt to disposable income rose to a record last quarter, with credit-market debt such as mortgages rising to 164.6 percent of disposable income, compared with 163.3 percent in the prior three-month period, Statistics Canada said Dec. 13.

Bank of Canada Governor Mark Carney, who called the debt ratio the biggest domestic risk to the economy, has kept the key lending rate at 1 percent for more than two years, the longest pause since the 1950s. Carney will leave the central bank June 1 to take the same job with the Bank of England.

Budget Talks

Canada’s economy is forecast to expand 1.8 percent next year after increasing 2 percent in 2012, according to the median estimate of economists surveyed by Bloomberg.

President Barack Obama said during a televised press conference he would veto a tax proposal presented by House Speaker John Boehner because it would put too big a burden on the middle class, and said he wants a deal in place by Christmas.

The House may vote tomorrow on Boehner’s “Plan B,” which would raise tax rates on income over $1 million, rather than the $400,000 threshold the president proposed in his latest offer. The U.S. is Canada’s biggest trade partner.

“The Canadian dollar appears to be the currency of choice for those looking to hedge fiscal-cliff risk,” Camilla Sutton, head of currency strategy at Bank of Nova Scotia, said by phone from Toronto.

Canada’s currency has gained 0.3 percent this year versus nine developed-nation peers tracked by Bloomberg Correlation-Weighted Indexes. The greenback has dropped 3.2 percent and the yen has been the biggest loser, tumbling 12 percent. New Zealand’s dollar leads gainers, up 4.5 percent.

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