Canadian dollar rises as traders look to key Fed meeting for clarity on stimulus

TORONTO – The Canadian dollar closed higher Friday with traders focused on the Federal Reserve and whether the central bank will move to cut back on monetary stimulus at its interest rate meeting next week.

The loonie advanced 0.4 of a cent to 94.38 cents US as the greenback weakened in the afternoon after having gained ground against other currencies earlier following the passage of a budget agreement in Congress Thursday night.

Expectations about the Fed tapering its US$85 billion a month of bond purchases have changed over the last month. Previously markets largely expected that the central bank would hold off until March when incoming chair Janet Yellen is settled in her new job.

But a string of strong data last week, capped by a solid employment report for November, has raised concerns that the Fed could act when the Federal Open Market Committee meets Dec. 17-18.

A better than expected retail sales report for November and the budget agreement arriving earlier this week further served to raise expectations.

The U.S. stimulus has supported a rally on stock markets over the past few years, and its potential reduction has jolted markets since May when outgoing Fed chair Ben Bernanke first mentioned the possibility of tapering. However, any cutback in asset purchases would be gradual and is expected to be accompanied by a renewed commitment by the Fed to keep interest rates low.

The focus will likely remain on the Fed until its decision next Wednesday.

On the commodity markets, January crude on the New York Mercantile Exchange declined 90 cents to US$96.60 a barrel.

March copper was up two cents at US$3.31 a pound while February gold bullion gained $9.70 to US$1,234.60 an ounce.

Traders also digested comments by Chinese leaders that the world’s second-largest economy faces “downward pressure” and have called for boldness in carrying out promised reforms aimed at reviving slowing growth.

In a report following an annual planning meeting, Communist party leaders said Friday that the country faces problems including excess production capacity in some industries and environmental degradation.