Canada's Dollar Exceeds Par on the Outlook for Rate Advantage

The Canadian dollar rose above par against the U.S. currency for the first time in three weeks on speculation Canada's interest-rate advantage over the U.S. may widen.

Canada's dollar strengthened versus 14 of the 16 most- traded currencies before the Federal Reserve decision tomorrow. Policy makers may cut the U.S. benchmark lending rate by 50 basis points to 3 percent, according to futures prices quoted on the Chicago Board of Trade. That would widen the rate gap to 1 percentage point, with Canada's borrowing costs at 4 percent.

``It's a part of a broad-based U.S. dollar weakness before the rate meeting,'' said Matthew Strauss, a senior currency strategist in Toronto at RBC Capital Markets. ``Currencies linked to commodity exports are generally gaining in this environment.''

The currency, known as the loonie after the image of the bird on its one-dollar coin, rose 0.4 percent to 99.95 Canadian cents per U.S. dollar at 4 p.m. in Toronto, from C$1.0035 yesterday. It touched 99.44 Canadian cents, the strongest since Jan. 4. One Canadian dollar buys $1.0007.

The U.S. dollar declined against 10 of the 16 most-traded currencies. The Canadian dollar gained the most, 0.8 percent, against the Swiss franc today.

The Canadian dollar gained 1.9 percent last week, wiping out losses it suffered earlier this month.

Interest-rate futures traded on the Chicago Board of Trade show 78 percent odds the Fed will lower borrowing costs a half- percentage point tomorrow and a 22 percent chance of a quarter- percentage point cut. The odds were 80 percent and 20 percent, respectively, on Jan. 22.

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Yen Rises as Credit-Market Losses Sap Demand for Higher Yields

The yen gained against 15 of the 16 most-active currencies on speculation credit-market losses will prompt investors to sell higher-yielding assets.

The currency rose the most versus Australia's dollar after U.S. regulators started probing the finance industry over the collapse of the subprime mortgage market. The dollar snapped two days of gains versus the yen on speculation the Federal Reserve will cut interest rates by 50 basis points today, reducing the allure of U.S. debt.

``The subprime problems don't seem to be fully resolved yet,'' said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan's largest currency broker. ``Investors are still very averse to taking on risk. It's a factor for buying the yen.''

The yen climbed to 106.73 against the dollar at 1:48 p.m. in Tokyo from 107.11 late in New York yesterday. It also rose to 157.62 per euro from 158.27. It will advance to 106.70 versus the dollar and 157.50 against the euro today, Ishikawa forecast.

The currency rose 0.5 percent to 94.79 per Australian dollar from 95.25. Declines in higher-yielding currencies accelerated after the MSCI Asia-Pacific Index fell 1 percent, reversing an earlier rally.

The yen is set for a monthly gain versus all 16 of the most-active currencies, rising 9.5 percent this month versus the South African rand to 14.8738, and 5.6 percent against the South Korean won to 8.84041.

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Aussie, Kiwi, Real Rally as Yield Lures Putnam, Daiwa

Jan. 28 (Bloomberg) -- The best bets in the currency market may be Australia, New Zealand and Brazil, where economists predict central bankers will keep interest rates unchanged, or even raise them, while growth continues unabated on rising exports to China.

Kokusai Asset Management Co., Pacific Investment Management Co. and Putnam Investments LLC are investing in southern hemisphere countries to benefit from the highest bond yields relative to U.S. debt this decade. Australia's two-year government bonds yield 4.4 percentage points more than Treasuries of similar maturity. In New Zealand, the gap is 5.1 percentage points, and in Brazil, it's 9.1 percentage points.

Australia, New Zealand and Brazil are best positioned to weather a slowdown in the U.S. because a rising percentage of their goods are headed to China, where growth may average 10.3 percent this year, said investors such as Masataka Horii at Kokusai in Tokyo. China has overtaken the U.S. as Australia's largest export market after Japan, and the nation increased imports from Brazil fivefold over the last six years. Brazil kept its target rate at 11.25 percent last week and New Zealand left its at 8.25 percent. The Reserve Bank of Australia meets next week.

``We're very bullish on Australia,'' said Horii, who helps manage the $50.2 billion Kokusai Global Sovereign Open fund, the world's second-biggest managed bond fund. ``The countries that are expected to hike rates are limited. They have good relations with Asian economies, especially China.''

read more:Aussie, Kiwi, Real Rally as Yield Lures Putnam, Daiwa

Yen Rises as Stock Slump Spurs Sales of Higher-Yielding Assets

The yen rose against all 16 of the most-active currencies as Asian stocks slumped, prompting investors to sell higher-yielding assets outside of Japan.

The currency gained the most against the South African rand as China's benchmark stock index declined almost 7 percent, adding to concern global economic growth will slow. The pound dropped against the dollar after an industry report showed U.K. house prices fell for a fourth month.

``Asian stocks, especially in China, are really performing badly,'' said Kenichi Yumoto, senior dealer in Tokyo at Societe Generale SA, France's second-largest bank by market value. ``This is causing risk aversion among investors, prompting yen- buying.''

The yen gained to 106.61 per dollar at 8:07 a.m. in London from 106.72 in New York Jan. 25. The currency climbed to 156.38 per euro from 156.68. Against the euro, the dollar was at $1.4670 from $1.4681. Japan's currency may rise to 105.80 per dollar and 155 a euro today, Yumoto said.

Japan's currency jumped 0.7 percent to 14.8266 versus the rand and rose 0.4 percent to 210.76 per pound from 211.66. It climbed 0.2 percent to 105.63 against the Canadian dollar. The MSCI Asia-Pacific Index of regional shares fell 3.2 percent, as China's CSI 300 Index slumped 6.8 percent.

Britain's currency weakened against all 16 of the most- active counterparts tracked by Bloomberg and fell to $1.9767, from $1.9831. The average cost of a home in England and Wales fell by 0.3 percent in January, according to Hometrack Ltd., a London-based research group.

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Alarm bells send dollar falling

The dollar plummeted on Tuesday after an emergency cut in the US federal funds rate set alarm bells ringing over the health of the country’s economy.

The dollar – which traded strongly on Monday as US investors repatriated funds in the face of the sell-off in global equities – sold off aggressively.

By midday in New York, the dollar was down 1.3 per cent to $1.4630 against the euro, had lost 1 per cent to SFr1.0980 against the Swiss franc and dropped 0.9 per cent to $1.9610 against the pound.

Analysts said the dollar could fall more, given that the Fed’s 75bp cut risked being seen as a panic move.

They said this implied that the central bank could be in possession of specific information which had increased its concerns over the health of the US financial sector.

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Weak data force bank to take bold approach

Tuesday’s aggressive move by the Federal Reserve represents an urgent effort to catch up with – and it is hoped get ahead of – the rapid deterioration in the US economic outlook.

It also represents an implicit admission by the US central bank that it had fallen behind the curve on monetary policy.

Policymakers were increasingly concerned that while they had cut interest rates by 100 basis points since the credit crisis began, rates were still far too high, given the state of the economy. In particular, they had cut rates by only 25 basis points since the end of October – a shift officials recognised was not enough to offset the deterioration in financial conditions, never mind provide any insurance against the worst-case risks to growth.

In their defence, the ....

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Bank of Japan votes unanimously to keep overnight call rate target unchanged

TOKYO (Thomson Financial) - The Bank of Japan kept its overnight call rate target unchanged at 0.5 percent for the 13th straight meeting Tuesday, as widely expected.

This gives the Japanese central bank time to assess whether the financial market turmoil triggered by the credit crisis in the US will settle down soon, and whether weakness in the US housing market poses further material downside risk to its economy, given that the US is one of Japan's most important trading partners.

The Japanese central bank also needs to ascertain whether the Japanese economy can maintain its recovery momentum despite emerging uncertainty about domestic private demand and the appreciation of the yen.

The Bank of Japan said the nine members of its policy board voted unanimously to leave the rate unchanged.

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