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Loonie declines despite higher oil as key rate unchanged

Counting U.S. dollars

Ian Waldie/2004 Getty Images

The Canadian dollar gave up early gains and closed lower after the Bank of Canada's announced it was leaving interest rates unchanged and warned of the negative effects of a rising currency.

The loonie was 0.37 cents (U.S.) lower at 102.57 cents after the central bank said it would keep its key overnight rate at 1 per cent.

The bank observed that the economic recovery in Canada is proceeding slightly faster than expected and that "while consumption growth remains strong, there are signs that household spending is moving more in line with the growth in household incomes."

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But the bank also warned that "the export sector continues to face considerable challenges from the cumulative effects of the persistent strength in the Canadian dollar and Canada's poor relative productivity performance."

"And we have to agree with that," said Jacqui Douglas, senior macro and foreign exchange strategist at TD Securities.

"With the Canadian dollar trading at fresh three-year highs this morning, the bank will definitely have its eye on the currency going forward."

Higher commodity prices had earlier helped support the currency as fighting in Libya continued to unnerve markets. The April crude contract on the New York Mercantile Exchange closed up $2.66 at $99.63 a barrel.

Moammar Gadhafi, Libya's ruler of 41 years, has already lost control of the eastern half of the country since protests demanding his ouster began two weeks ago. He still holds the capital, Tripoli, and nearby cities.

Prices have been volatile over worries about making up the shortfall from Africa's biggest crude producer and worries over whether the political upheaval will spread to other oil-rich countries.

And while the loonie has benefited from higher crude prices, Ms. Douglas noted that support for the currency tends to decline as oil hits a psychologically important milestone.

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"Last time around, when we saw a spike in crude oil prices, the (supportive) effect on the Canadian dollar petered out after crude oil hit about $100 a barrel as growth concerns started to dominate the effect on the currency," she said.

Gold prices also advanced as investors looking for a safe haven sent the April bullion contract in New York up $21.30 to a record close of $1,431.20 an ounce.

Copper prices also improved as the May copper contract in New York climbed a cent to $4.51 a pound.

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