Loonie closes down, slips to Oct. 2011 lows, greenback up on Fed expectations

TORONTO – The Canadian dollar closed lower Monday but well off the worst levels of the session as the U.S. dollar continued to appreciate on expectations that the U.S. Federal Reserve is set to wind up a key economic stimulus program.

The loonie moved down 0.27 of a cent to 95.37 cents US after going as low as 94.75 cents, its lowest level since early October 2011. The currency had tumbled 2.7 cents against the U.S. dollar last week as the yields on 10-year U.S. Treasuries began rising towards two-year highs.

Fed chairman Ben Bernanke signalled on Wednesday that the U.S. central bank could start to wind up its bond buying program this year and wrap it up by the middle of next year.

The Fed’s quantitative easing has kept long-term bond yields low in an effort to stimulate borrowing and boost U.S. economic activity following the 2008 financial meltdown.

Indications that the Fed is prepared to ease up on its US$85 billion of bond purchases each month continued to send the benchmark 10-year Treasury higher, rising to 2.55 per cent Monday afternoon, lower than the 2.63 per cent level racked up during the morning, which was close to a two-year high, and up from 2.25 per cent prior to Bernanke’s news conference last Wednesday. The yield had been as low as 1.6 per cent at the beginning of May.

The stronger greenback also helped depress metal prices, along with demand concerns. That is because a stronger greenback makes it more expensive for holders of other currencies to buy oil and metals which are dollar-denominated.

July copper crept closer to the US$3 level, down another seven cents to $3.02 a pound on the NYMEX.

Gold prices also continued to tumble, down $8.40 to US$1,283.60 an ounce. Bullion fell to three-year lows last week in the wake of the indication by the Fed of lower bond purchases.

Meanwhile, Goldman Sachs cut its outlook on the metal for 2013 and 2014, citing growing price risks from an improving U.S. economic picture. The bank now expects gold to end this year at $1,300 an ounce, down 9.4 per cent on its previous forecast. Goldman Sachs sees gold ending 2014 at $1,050 an ounce, down 17.3 per cent on its earlier outlook.

But the August crude contract on the New York Mercantile Exchange erased early losses to gain $1.49 to US$95.18 a barrel.

China was also in focus Monday after Beijing allowed commercial lending rates to soar in a move analysts said was aimed at curbing a booming underground lending industry.

Analysts say the spike late Thursday in the country’s interbank lending rate to over 13 per cent was part of an effort to trim off-balance-sheet lending that could threaten the financial stability of the world’s second-largest economy.

But markets feared the move could also hurt economic growth. China’s major state-owned banks are unwilling to lend to any but their biggest clients, so the vast majority of smaller businesses must rely on informal lending.