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Loonie rises on optimism ECB will move to keep lid on borrowing costs

Canadian dollars.

John Cowie/iStockphoto

The Canadian dollar turned higher Friday amid hopes that the European Central Bank is moving closer to dealing with the high borrowing costs of heavily-indebted countries such as Spain.

Higher oil prices also helped push the commodity-sensitive loonie up 0.15 of a cent to 100.89 cents (U.S.). The loonie shook off early losses amid a report from Reuters that the European Central Bank was considering yield targets in a bond-buying program.

Markets have been supported this month after European Central Bank president Mario Draghi pledged to do whatever was necessary to protect the euro currency. Traders had hoped this would be backed up by definitive measures at the ECB's next interest rate meeting Sept. 6.

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But traders reacted cautiously after bank officials said Friday that Draghi may wait until Germany's Constitutional Court rules on the legality of Europe's permanent bailout fund before announcing any new measures to buy government bonds.

The court is set to rule on Sept. 12.

Markets skeptical about the ability of countries such as Spain and Italy to manage high debt levels amid deteriorating economic conditions had earlier sent yields on government debt to unsustainable levels. Traders have been hoping the ECB would launch a program to buy up government bonds to keep yields lower.

Mark Chandler, head of Canadian FIC Strategy at RBC Dominion Securities, also noted that risk earlier advanced after the German Finance Ministry confirmed for the first time that a scenario involving a Greek exit from the euro zone "and accompanying contagion firewalls are being examined."

Greek Prime Minister Antonis Samaras is in Berlin for talks with German Chancellor Angela Merkel.

Mr. Samaras has been arguing that Greece should have more time beyond the mid-2014 deadline to complete reforms that are a condition of it continuing to receive bailout loans. Without the help, Greece would be forced into a chaotic default on its debts and could be forced out of the euro zone.

But Germany's finance minister has argued that giving Greece more time wouldn't solve the country's problems.

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A disappointing durable goods report added to the debate over whether the U.S. economic recovery has weakened to a point where the Federal Reserve will launch another round of stimulus measures. The U.S. Commerce Department said that orders for durable goods rose a seasonally adjusted 4.2 per cent in July. But excluding aircraft and other transportation goods, orders dropped 0.4 per cent. Economists had expected a 2.5-per-cent rise.

Minutes of the U.S. Federal Reserve's last policy meeting showed many bankers favoured more stimulus.

But doubts about Fed intentions arose almost immediately after St. Louis Federal Reserve Bank president James Bullard said Thursday that the minutes from the Aug. 1 meeting were stale because the economy had picked up since then.

Adding to uncertainty was Chicago Fed President Charles Evans, who said the Fed should take action to bolster the economy.

Commodity prices were mixed Friday as the October crude contract on the New York Mercantile Exchange erased early losses to move up 69 cents to $96.96 a barrel.

September copper dipped a penny to $3.48 a pound while December gold lost $3.70 to $1,669.10 an ounce.

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