Upbeat comments from Bank of Canada Governor David Dodge helped lift the dollar by more than half a cent at one point yesterday, pushing it briefly above 63 cents and making its gains in the past two days its best performance since last April.
The dollar ended the day at 62.71 cents (U.S.), up 0.32 cents from Monday, for a gain of 0.6 cents so far this week.
"A catalyst for the latest move was the numerous rounds of cheerleading by the Governor of the Bank of Canada and the Finance Minister," said Rob Palombi, a fixed income analyst with Standard & Poor's MMS. "Mr. Dodge said a depreciating currency is unhelpful for a recovery, and the financial markets see foreign exchange intervention as a real threat," he added.
The loonie has been gaining ground since last week, when Mr. Dodge, Finance Minister Paul Martin and Prime Minister Jean Chrétien pointed to Canada's strong economic fundamentals as reasons for the dollar to be higher.
In a speech in Saskatoon yesterday, Mr. Dodge repeated his message that the economy is on the road to recovery. The dollar reached 63.14 cents after his speech, continuing a move higher in overseas markets early in the trading day.
Recent signs "of a pickup in economic activity in Canada are encouraging," Mr. Dodge said. "But the recent movements in the Canada-U.S. exchange rate do not appear to have reflected those developments, and the depreciation we saw over the last couple of weeks is not helpful for the economy. "Economic recovery in Canada does not hinge on the current low levels of the Canadian dollar against its U.S. counterpart," he said.
However, market players see the jawboning as having a short-lived effect on the currency's value.
The market pays attention to what government officials say about the currency, and "up to now there were no comments from the [central]bank or the government, so it was a free trade to take the dollar lower," said Andrew Pyle, an economist with Bank of Nova Scotia. "Now that the Bank has drawn a line in the sand, it's injected caution on the speculative side.
"But the gains could be short-lived, and everybody is wanting to know: Is the bank serious?" Mr. Pyle said. "They are wondering: What would the bank do if [the dollar]goes back to [record lows] . . . Would it intervene?"
Analysts had said the recent selloff that drove the loonie to a series of record lows was triggered by speculative selling.
At one point last week it traded as low as 61.75 cents.
"What sparked the rally is a perception of a shift in Canadian government policy toward the dollar," said Michael Malpede, a currency analyst in Chicago with Refco Inc., adding that Mr. Dodge's comments put an end to the widely held perception in the market that Canada supported a weak currency to help its exporters.
After Mr. Dodge referred to foreign exchange intervention as a tool to defend the currency, people are wondering if Canada is prepared to spend money to do this, he added.
Currently the Bank of Canada has $34-billion in foreign exchange reserves at its disposal to defend the currency.
For the past two weeks Canadian funds have been buying U.S. dollar assets when the Canadian dollar was weak, said Robert Keiser, analyst with MCM Currency Watch in New York. When Mr. Dodge began talking in defence of the dollar the funds were not willing to take on the Bank of Canada at those levels, and so they sold their U.S. positions and bought Canadian dollars, he added.