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Loonie surges, greenback weakens as Fed reassures on stimulus

Canadian dollars.

Jonathan Hayward/The Canadian Press

The Canadian dollar was up sharply Thursday morning amid a sharp drop in the greenback after U.S. Federal Reserve chairman Ben Bernanke reassured markets the central bank is in no rush to pull the rug on its stimulus measures.

The loonie was up 1.25 cents (U.S.) at 96.33 cents. It had surged as high as 96.84 cents after Bernanke said in a speech late Wednesday that the U.S. economy still needs help from the central bank's low interest rate policies.

The Fed chief said that is because unemployment remains high and inflation is below the Fed's target.

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"The reaction to chair Bernanke's comments played out relatively violently in currency markets, with the U.S. dollar weakening against all the majors," observed Scotia Capital chief currency strategist Camilla Sutton.

"The dramatic U.S. dollar drop highlights how one-sided (U.S. dollar bullish) the market had become and how quickly traders raced to close out long U.S. dollar exposures."

The Canadian dollar had weakened considerably since late May when Bernanke initially indicated that the Fed would likely slow its bond purchases later this year and end them around mid-2014 if the American economy strengthens.

The Fed has been buying $85-billion of financial assets a month to keep interest rates low and encourage borrowing and spending. That stimulus has driven global stocks higher, so the prospect of reducing it has created market volatility in recent weeks.

Bernanke's latest comments came after the release of minutes from the Fed's most recent meeting, which showed that about half of the Fed's 19-member policy-making committee would support an end to the bond-buying program late this year.

But many also agreed at the meeting last month that the job market's improvement would have to be sustained before the Fed would reduce the purchases.

The meeting was held prior to the release of a stronger-than-expected U.S. employment report for June, which came out last Friday.

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Expectations of a tapering in bond buying has had the effect of pushing U.S. Treasury yields sharply higher. On Wednesday, the benchmark 10-year Treasury was up slightly from before the release of the Fed minutes to 2.69 per cent, well above levels of about 1.7 per cent at the beginning of May. The 10-year was down to about 2.58 per cent Thursday morning.

Gold prices shot up following Bernanke's comments, with the August contract on the New York Mercantile Exchange ahead $34.10 to $1,281.50 an ounce.

Gold prices have enjoyed a sharp increase in recent years as a result of quantitative easing by the Fed and other central banks worldwide because QE involves printing more money to finance bond purchases. But those prices had fallen sharply in the weeks since Bernanke initially indicated that the Fed could move towards tapering those purchases.

The lower dollar also helped boost metal prices with September copper ahead eight cents to $3.17 a pound.

The lower U.S. dollar lifted commodities because a weaker greenback makes it less expensive for holders of other currencies to buy oil and metals, which are dollar-denominated.

However, the August crude contract on the Nymex backed off $1.52 to $105 a barrel after a report from the International Energy Agency said oil supplies would exceed the expected rise in demand in 2014, partly because of growing production in North America.

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Prices had closed at a 15-month high Wednesday after the American Petroleum Institute said that U.S. crude inventories fell by nine million barrels last week, much higher than the 3.8-million-barrel drop that analysts had expected.

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