Canadian dollar up, greenback lower ahead of expected Fed stimulus announcement

TORONTO – The Canadian dollar was higher Wednesday morning as the greenback weakened ahead of expectations that the U.S. Federal Reserve will deliver more stimulus to keep America’s fragile recovery on track.

The loonie rose 0.06 of a cent to 101.46 cents US.

The Fed is widely expected to announce a new bond-buying program to replace one that’s about to expire at the end of its two-day policy meeting later Wednesday.

The central bank is expected to announce an open-ended program involving spending US$45 billion a month on Treasurys, which would complement an existing program where the Fed buys mortgage backed securities to the tune of $40 billion a month.

The Fed has launched three rounds of quantitative easing since the financial crisis hit in 2008 and they have been widely credited with strengthening financial markets.

Analysts say the Fed will also likely paint a somewhat less than rosy picture of the American economy.

“Back in October, the press release said ‘household spending has advanced a bit more quickly, but growth in business fixed investment has slowed’,” said BMO Capital Markets senior economist Michael Gregory.

“Now, the former lacks momentum while the latter actually contracted in the latest quarter. Then, there’s that fiscal headwind with an unknown punch lurking on the immediate horizon,” he said, referring to the looming fiscal cliff.

That is the name for a situation that could arise as automatic steep spending cuts and significant tax increases click in at the start of the year unless Republicans and Democrats can come to a compromise. With economic growth already weak, the worry is that the two moves would slash growth further and drive the U.S. back into recession, sending shock waves around the world.

Crude prices were higher as OPEC oil ministers signalled that they will stick to current daily output targets of 30 million barrels at their meeting Wednesday.

The January crude contract on the New York Mercantile Exchange was up 61 cents to US$86.40 a barrel.

Copper prices also improved with the March contract on the Nymex ahead one cent to US$3.70 a pound.

February gold bullion gained $8.80 to US$1,718.40 an ounce.

On the economic front, there was another indication that the recession in the eurozone is worsening.

Eurostat, the EU’s statistics office, said industrial production fell by a monthly 1.4 per cent in October, in contrast to expectations of a modest 0.2 per cent increase.

Germany, Europe’s biggest economy, fared particularly badly, with its industrial sector posting a 2.4 per cent monthly decline in output. Germany has actually seen its industrial sector shrink for three straight quarters.

The eurozone fell back into a mild recession in the third quarter.