The Canadian dollar closed higher Wednesday, as the U.S. dollar weakened, amid data showing that first quarter U.S. economic growth came in much lower than first thought.
The loonie advanced 0.27 of a cent to 95.43 cents (U.S.) after the U.S. Commerce Department said first-quarter gross domestic product grew at an annualized rate of 1.8 per cent, down from the previous reading of 2.4 per cent.
The steep revision was mostly because consumers spent less, suggesting higher taxes in the United States are having a deeper impact on the country’s economic growth than previously thought.
In turn, that could affect the timing of the Federal Reserve’s decision to gradually withdraw some of its economic stimulus by tapering off the central bank’s bond-purchasing program, known as quantitative easing or QE.
“The weaker start to the year may have some people downgrading the chances of an early tapering by the Fed, particularly if consumer spending in Q2 looks softer as a result,” said CIBC World Markets economist Andrew Grantham.
“However, with the first quarter now well in the rear-view mirror, next week’s data from the (manufacturing sector) and non-farm payrolls report may still be more important in determining when and by how much the Fed tapers QE.”
Federal Reserve chairman Ben Bernanke made it clear last week that such a move depends on the strength of the U.S. economy. The greenback rose following his remarks and the gain accelerated Tuesday in the wake of solid reports on manufacturing, housing and consumer sentiment.
The strong advances in the greenback pushed the loonie down to 94.75 cents on Monday, its lowest levels since October, 2011.
U.S. bond yields have also spiked over the past week on speculation the Fed could move to ease up on its bond purchases later this year and wind up the program by the middle of 2014.
On Wednesday, the benchmark U.S. 10-year Treasury yielded 2.54 per cent, up from 2.25 per cent before Mr. Bernanke’s remarks last Wednesday and about 1.7 per cent at the beginning of May.
The commodity-sensitive Canadian dollar rose amid sliding prices for oil and metals.
The August crude contract on the New York Mercantile Exchange drifted 18 cents higher to $95.50 a barrel.
July copper declined 3 cents to $3.04 a pound and August bullion on the Nymex fell $45.30 to $1,229.80 an ounce after earlier falling to a three year low of $1,223.20. Gold prices have deteriorated steadily this year as the precious metal loses its appeal as a hedge against inflation and deteriorating currencies.