Canadian Dollar Falls as Central Bank Cuts Borrowing Costs

By Chris Fournier

Dec. 9 (Bloomberg) -- Canada’s currency declined after the central bank reduced its target lending rate by more than anticipated to a half-century low and signaled more action may be needed to spur economic growth.

Policy makers lowered borrowing costs by 75 basis points to 1.50 percent, the Ottawa-based central bank said in a statement today. Economists predicted the half-point reduction, according to the median of 23 estimates in a Bloomberg survey.

“Given that the market had partially priced in a 75 basis- point reduction, I think the impact on currency would be muted,” said Matthew Strauss, senior currency strategist at RBC Capital Markets in Toronto. “In the case of Canada, the impact for the economy would be positive and ultimately for the currency, a mild positive.”

The Canadian dollar weakened as much as 1.5 percent to C$1.2693 per U.S. dollar in Toronto at 9:07 a.m., from C$1.2502 yesterday. One Canadian dollar buys 78.70 U.S. cents.

The loonie has lost 19 percent in six months as the global recession reduced demand for commodities, which generate about half of the export revenue of the world’s eighth-largest economy. Crude oil prices have dropped by half in 12 months.

Employers cut 70,600 jobs in November, almost triple economists’ projections, Statistics Canada reported Dec. 5. Canadian new-home starts fell more than economists forecast last month, a separate report showed yesterday.

The European Central Bank cut its main refinancing rate by 0.75 percentage point to 2.5 percent on Dec. 4, the biggest reduction in its 10-year history. The Bank of England that day lowered its rate by one percentage point to 2 percent. Canada’s decision comes one week before the U.S. Federal Reserve’s next meeting, followed by the Bank of Japan.

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