Canada's Dollar Falls Most in a Week on Interest-Rate Reduction

By Chris Fournier

Oct. 21 (Bloomberg) -- Canada's currency fell the most in almost a week after the central bank cut borrowing costs for the fifth time since December.

Canada's dollar has depreciated 12 percent this month as commodities have weakened. Policy makers lowered the key rate a quarter-percentage point to 2.25 percent. Economists had forecast a half-point reduction, the median of 25 estimates.

``The point is they still cut rates,'' said James Shugg, a senior economist at Westpac Banking Corp. in London, who correctly predicted the quarter-point reduction. ``Rates will probably still fall further.''

The Canadian dollar depreciated by as much as 1.8 percent to C$1.2123 per U.S. dollar, from C$1.1910 yesterday. It last traded at C$1.2094 at 9:47 a.m. in Toronto. The currency fell 2.4 percent on Oct. 15. One Canadian dollar buys 82.69 U.S. cents.

The central bank lowered its key rate to 2.5 percent from 3 percent on Oct. 8 as part of a coordinated effort to ease the economic effects of the financial crisis. Canada's dollar declined 2 percent that day.

Shugg said the Canadian dollar's decline has been overdone and predicts the currency will strengthen to C$1.08 by the end of 2009.

``The Bank of Canada sees the global economy in a mild recession, which will weigh on the Canadian dollar overall,'' said David Watt, a senior currency strategist at RBC Capital Markets in Toronto. ``The global economic backdrop still seems heavily weighted against the Canadian dollar.''

To contact the reporter on this story: Chris Fournier in Montreal at cfournier3@bloomberg.net