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Loonie hits 13-month high, strengthens to $1.03 against greenback

Canadian dollars.

JONATHAN HAYWARD/THE CANADIAN PRESS

The Canadian dollar hit a 13-month high on Thursday after the Federal Reserve launched another round of economic stimulus.

The currency strengthened to $1.0302, up more than half a cent from Wednesday's close, after the Fed said it will spend $40-billion (U.S.) a month on a new round of bond purchases to boost the weak economy, and has not set an end date.

The money will be spent on mortgage backed securities to keep interest rates low, encourage lending and support the slow recovery of the housing sector.

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The U.S. central bank will also continue to buy bonds with long maturity horizons under the its so-called Twist program, leaving them buying a total of $85-billion per month for the balance of the year under the two programs.

The Fed also says it will keep buying more bonds until the job market shows substantial improvement.

The stimulus program involves quantitative easing, which sees the central bank print more money to fund the bond purchases, which in turn weakens the currency.

The Fed turned to quantitative easing as a way to stimulate the economy after it lowered short-term overnight interest rates to about as low as they can go. The Fed said Thursday it has extended a plan to keep short-term rates at record lows through mid-2015.

The loonie has surged in value against the U.S. dollar since last week after European Central Bank president Mario Draghi announced the ECB would buy government bonds to hold borrowing costs down the most vulnerable eurozone members. And the greenback further weakened over the last week as speculation grew the Fed was prepared to launch a third round of stimulus, particularly after August job creation figures disappointed even modest expectations.

"Given how much was priced-in for this decision in recent days, a lot of this is priced in," said CIBC World Markets chief economist Avery Shenfeld.

"But to the extent that the market believes this will actually spur growth, it's a near term plus for risk assets."

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In two previous bond-buying programs, the Fed bought more than $2-trillion (U.S.) of Treasurys and mortgage-backed securities after the 2008 financial crisis.

The currency also found lift from higher commodity prices.

Oil prices advanced after attacks on U.S. diplomatic missions and the killing of the U.S. ambassador to Libya sparked new worries about unrest in the Middle East. The October crude contract gained 67 cents (U.S.) to $97.68 a barrel.

December copper was up a cent at $3.70 (U.S.) a pound while December bullion gained $24.90 to US$1,758.60 an ounce.

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