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Canadian dollar at 13-month high ahead of expected Fed word on stimulus

TORONTO – The Canadian dollar closed at a 13-month high Tuesday amid expectations that the U.S. Federal Reserve will launch another round of stimulus to help the American economy.

The loonie was off the highs of the session, closing up 0.45 of a cent to 102.75 cents US after going as high as 102.91 cents US as the greenback weakened ahead of the Fed’s two-day meeting on interest rates.

The central bank could announce another round of quantitative easing Thursday, which would see the Fed print more money to buy up bonds in order to keep interest rates low and encourage lending.

Expectations that the Fed would provide another jolt for the economy increased after jobs data released Friday failed to meet modest expectations of 125,000 new jobs. Instead, the economy cranked out 97,000 jobs and employment numbers for June and July were revised downward.

However, there is a degree of uncertainty as to whether the Fed will act now, especially as it may not want to become a key point of debate in the upcoming U.S. presidential election.

The American currency weakened further Tuesday morning after Moody’s Investors Service said it would likely cut its “Aaa” rating on U.S. government debt, probably by one notch, if federal budget negotiations fail. If the highly partisan Congress does not reach a budget deal, more than $600 billion in spending cuts and tax increases will kick in next year.

That scenario has been called the “fiscal cliff” because it is likely to send the U.S. economy back into recession and drive unemployment up.

Commodities were higher amid signs that the Chinese government may be moving to provide another round of stimulus measures to help a slowing economy.

A day after data showed Chinese imports and factory output continuing to slow, China’s premier Wen Jiabao promised to do more to encourage growth through more tax cuts and measures to boost consumer spending.

October crude on the New York Mercantile Exchange was ahead 63 cents at US$97.17 a barrel.

December copper on the Nymex was up a penny at US$3.70 a pound, adding to a 17-cent gain in the past two sessions.

Copper — seen as a global economic barometer as it is used in so many applications — rose following Jiabao’s comments. China is the world’s biggest consumer of the metal.

December bullion gained $3.10 to US$1,734.90 an ounce.

Traders also took in a strong housing report as Canada Mortgage and Housing Corp. said housing starts came in at an annual rate of 224,900 during August. The showing was a pleasant surprise as economists had expected a decline to 200,000.

“Clearly low interest rates continue to support home construction activity, although signs of deceleration in the secondary market could dampen that momentum,” said CIBC World Markets economist Emanuella Enenajor.

“Today’s data suggest residential construction in the third quarter may not be as measurable a drag to activity as previously thought.”

Other data showed that Canada’s trade performance hit a new low in July, establishing a record deficit of $2.3 billion as both exports and imports tumbled in the face of the weak global economy. Making matters worse, Statistics Canada revised June’s deficit to $1.93 billion, even deeper than the $1.81 billion deficit originally reported last month.