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Loonie closes sharply lower as Fed hints at stimulus end

A $100 bill is seen in this file photo.

Feng Yu/Thinkstock

The Canadian dollar tumbled almost a full cent Thursday in the wake of a hint from the U.S. Federal Reserve that it's moving closer to slowing a key piece of economic stimulus.The loonie closed down 0.94 of a cent to 96.4 cents (U.S.), adding to the six-tenths of a cent slide Wednesday.

The greenback and U.S. bond yields advanced after the Fed said Wednesday that it will maintain the pace of its bond purchases for now, which amount to buying $85-billion of bonds every month.

But it offered a more optimistic outlook for the U.S. economy and job market, which could be a signal that the program known as quantitative easing may soon be scaled back. But the statement issued after the Fed's two-day policy meeting gave no indication of when that might happen.

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Indications of such a slowdown of bond purchases have also sent yields higher, with the benchmark U.S. 10-year Treasury down from earlier highs but still at 2.42 per cent late Thursday. That's up from 2.25 per cent before the Fed's announcement Wednesday afternoon.

The yield was as low as 1.6 per cent at the beginning of May.

The Canadian dollar was also pressured by commodity prices, driven down by the higher U.S. currency and demand concerns amid weak Chinese economic data.

A higher U.S. dollar pressures commodities because a stronger greenback makes it more expensive for holders of other currencies to buy oil and metals which are dollar-denominated.

HSBC said the preliminary version of its monthly purchasing managers index for China fell to a nine-month low of 48.3 in June, down from 49.6 in May. Numbers below 50 indicate a contraction in the manufacturing sector.

June factory output decreased, a reversal from gains in the month before, while new export orders and new orders overall decreased at a faster rate.

The July crude contract on the New York Mercantile Exchange fell $2.84 to $95.40 a barrel. July copper lost 8 cents to $3.06 a pound.

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Bullion tumbled with the August contract falling $87.80 to $1,286.20, dropping below the key $1,300 level for the first time in nearly three years. Aggressive monetary stimulus programs by central banks have supported gold prices since the 2008 financial crisis and subsequent recession, partly because of worries about inflation. But prices have eroded as inflation remains tame and the global economic outlook continues to improve, albeit slowly.

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