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Canadian dollar surges to two-year high as greenback slides after Fed

A loonie is pictured in North Vancouver, on March 5, 2014.

Globe and Mail Update

The Canadian dollar hit its strongest level in more than two years against the greenback on Wednesday after language from the Federal Reserve's policy statement, which was seen as slightly more dovish than expected, sent the U.S. currency lower.

But currency strategists have expressed skepticism the Canadian dollar can rally much further, with expectations the Bank of Canada will raise interest rates one more time this year already fully priced into the market.

"The market is generally very bearish on the U.S. economy, the Fed, and on the U.S. dollar," said Benjamin Reitzes, senior economist and foreign exchange strategist at BMO Capital Markets. "We're the exact opposite in Canada. I'm not sure how much longer that dynamic can hold."

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At 4 p.m. EDT, the Canadian dollar was trading up 0.5 per cent at $1.2453 per greenback, or 80.30 U.S. cents.

The loonie earlier pushed through a 2016 support level and touched $1.2415, or 80.55 U.S. cents, its strongest level since June 30, 2015.

"If the pace we've seen were to continue, that would be an issue, but if you get a period of stability, I think (the Bank of Canada) would probably be comfortable-ish with it here," said Reitzes.

The Canadian dollar has soared 10 per cent since early May on the back of a weaker U.S. dollar and robust economic data that spurred the Bank of Canada to raise interest rates, while higher oil prices also supported. Bond yields hit multi-year highs earlier this week and U.S.-Canada two-year bond yields spread have narrowed sharply since June.

The Fed kept interest rates unchanged as widely expected, but said it would begin implementing balance sheet normalization "relatively soon," a change from its June statement, which said "this year." Economists also noted the Fed's language acknowledged concerns over a slow inflationary environment.

The U.S. dollar turned negative against a basket of major currencies following the statement and touched its lowest level since June 2016.

Canadian government bond prices were higher across the maturity curve, with the two-year price up 7.5 Canadian cents to yield 1.287 per cent and the benchmark 10-year rising 43 Canadian cents to yield 1.968 per cent.

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The Canada-U.S. two-year bond spread was –6.9 basis points, while the 10-year spread was –32.3 basis points.

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