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Loonie ends lower as Canada’s key rate left unchanged

Canadian dollars

Jonathan Haywar/The Canadian Pres

The Canadian dollar piled on the losses Wednesday after the Bank of Canada kept its key rate unchanged at 1 per cent and indicated it is in no rush to raise rates.The loonie gave up all of Tuesday's gain of almost half a cent, closing down 0.45 of a cent to 96.02 cents (U.S.).

The latest word on interest rates from the Bank of Canada and the Monetary Policy Report represent the first policy announcement from the central bank's new governor, Stephen Poloz.

The Poloz influence was evident in the explanatory note to the rate announcement, which dropped the reference that interest rates are likely to remain unchanged for a period of time. Instead, the new governor made clearer that he intends to make no changes as long as considerable slack remains in the economy, inflation remains muted and household finances continue to improve.

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"The forward-looking language was made somewhat more definitive than in previous iterations of the communiqué, tying the normalization of interest rates to specific economic factors such as household indebtedness, economic slack and muted inflation," said TD Bank economist Francis Fong.

"While these factors have always been top of mind for the bank, they were made somewhat more explicit."

The Bank of Canada has kept its key rate at 1 per cent since September, 2010.

Be4cause of a stronger-than-anticipated first quarter, the Canadian central bank's new outlook raises this year's growth forecast to 1.8 per cent from the previously projected 1.5 expectation.

The bank sees the economy expanding at a rate of 2.7 per cent in 2014 and 2015, little different from the April forecast of 2.8- and 2.7-per-cent growth in the two years.

The bank continues to anticipate that the Canadian economy won't return to full capacity until mid-2015.

Traders also digested remarks from Federal Reserve chairman Ben Bernanke that the Fed could slow the pace of a key element of economic stimulus later this year if the economy strengthens. But Mr. Bernanke cautioned that the Fed wants to see substantial progress in the job market before scaling back its $85-billion in monthly bond purchases.

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Markets went through weeks of volatility after Mr. Bernanke first mentioned in late May that the Fed could start tapering its program of monthly purchases of $85-billion of bonds later this year and wind it up by the middle of next year.

Investors feared Mr. Bernanke's comments meant that the Fed was ready to let rates rise sooner and faster than they'd expected.

Since then, the Fed has tried to soothe nerves by stressing that the Fed won't pull back on its stimulus unless there's clear evidence that the economy and the job market are improving as much as the Fed has forecast.

But the U.S. dollar has weakened and bond yields have risen ever since Mr. Bernanke mentioned the possibility of tapering. The benchmark U.S. 10-year Treasury has risen from about 1.6 per cent at the beginning of May to around 2.5 per cent.

Commodity prices were mixed with the August crude contract on the New York Mercantile Exchange up 48 cents to $106.48 a barrel.

September copper on the Nymex dipped 6 cents to $3.13 a pound. August gold bullion declined $12.90 to $1,277.50 an ounce.

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On the economic front, the Fed said in its latest regional survey that it sees the overall economy growing at a modest to moderate pace, although there is some reluctance to hire full-time workers. The Fed also said six districts reported faster growth in multifamily construction.

Other data showed U.S. builders started work on fewer homes and apartments in June. However, the slowdown wasn't enough to suggest the housing recovery is faltering.

Developers began construction at a seasonally adjusted annual rate of 836,000 homes in June, nearly 10 per cent below May's total of 928,000, which was revised higher.

Editor's note: Economist Francis Fong's bank affiliation has been corrected in the online version of this story.

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