The Canadian dollar closed higher Tuesday amid rising commodities and a warning from the Group of Seven leading industrial nations that volatile movements in exchange rates can adversely affect the global economy.The loonie was up 0.16 of a cent to 99.73 cents (U.S.).
The statement from the G7 group, which includes Canada, also affirmed their commitment to exchange rates determined by the markets and not government policy.
The statement came out prior to a weekend meeting of Group of 20 finance ministers where exchange rates and the threat of a "currency war" are expected to feature heavily.
"Today's anticipated G7 statement draws the line that beyond committing to market-determined exchange rates and noting that excessive volatility have adverse implications, the G7 commits that they will not target foreign exchange rates through monetary policy," said Scotia Capital chief currency strategist Camilla Sutton.
"This distinction is important as, if monetary policy's intended outcome is to weaken the currency for economic gain, it would be considered part of a currency war. However, if monetary policy's goal is to improve the domestic economic environment and the byproduct is a weaker currency, than it is far more globally acceptable."
During the morning, Bank of Canada Governor Mark Carney warned that the Canadian economy would suffer in a currency exchange war. Carney told a parliamentary committee in Ottawa that as a smaller economy, Canada does not have the flexibility of the United States and it would be futile for him to seek to manipulate the level at which the loonie is traded.
Mr. Carney said that at best, manipulating the currency works only in the short term. Eventually, the economy must adjust through lower wages for the country's workers, something he says parts of Europe are currently experiencing.
Attention has been centred recently on the Japanese yen, which dropped Monday to its lowest level against the U.S. dollar since May, 2010. The Japanese government has not directly intervened to get the value of the yen down. But it has set in motion a string of economic policies, such as a higher 2 per cent target for Japanese inflation, that many in the markets think will lead to more money being created in Japan.
One parallel effect of that policy has been a rise in the euro, which threatens to make the region's exports more expensive and hinder Europe's economic recovery.
Despite the G7 statement, the yen remained stable Tuesday as analysts observed that any country could claim that its loose monetary policy was used to help the domestic economy, not set the interest rate. There is little to stop the Japanese central bank, for example, from continuing to pursue its ultra-loose monetary policies.
Markets were also unfazed by a nuclear test conducted by North Korea on Tuesday. Pyongyang said it successfully detonated a miniaturized nuclear device at a northeastern test site.
Oil prices advanced, adding to Monday's gain of more than $1, largely due to a weaker U.S. dollar. The March contract on the New York Mercantile Exchange gained 48 cents to $97.51 a barrel.
April gold bullion on the Nymex edged 50 cents higher to $1,649.60 an ounce while March copper in New York moved up 2 cents to $3.74 a pound.