Canada Dollar Reaches 30-Year High on Outlook for Rate Increase

The Canadian dollar reached a 30- year high on speculation the Bank of Canada will raise its benchmark interest rate as soon as next month.

The currency gained 0.3 percent in June after the central bank said the prior month that it may lift rates ``in the near term'' from 4.25 percent. A quarterly survey by the central bank yesterday showed Canadian companies reported the most difficulty meeting new orders in almost seven years, and most expect inflation to exceed the central bank's 2 percent target.

``Inflation is a concern for the Bank of Canada,'' said Matthew Strauss, a senior currency strategist in Toronto at RBC Capital Markets Inc., a unit of Canada's biggest bank by assets. ``The Canadian dollar is going to gain again.''

The Canadian currency rose 0.2 percent this week to 93.87 U.S. cents. The currency yesterday touched 95.51 U.S. cents, or C$1.0471, the strongest since May 1977, as oil prices rose above $70 a barrel. The last time the Canadian currency and U.S. dollar traded at par was November 1976, the same month Jimmy Carter was elected U.S. president.

Canada's financial markets are shut on July 2 for a national holiday.

The central bank, which next meets on July 10, has kept the benchmark rate steady since May 2006. All five economists surveyed by Bloomberg predict the central bank will lift the rate to 4.5 percent next month.

Pared Bets

Futures contracts show investors are betting the central bank will raise rates once more after lifting them in July. September bankers' acceptances futures, a gauge of interest rates in Canada in that month, yield 4.765 percent, down from the June high of 4.81 percent. Bankers' acceptances futures have settled at a three-month lending rate averaging 16 basis points, or 0.16 percentage point, above the central bank's rate target since Bloomberg started tracking the difference in 1992.

Seventy percent of companies in yesterday's central bank survey predicted the consumer price index would advance by between 2 percent and 3 percent in the next year, the highest in the six years the bank has asked the question. Another 14 percent said inflation would be faster than 3 percent, the top end of the central bank's 1 percent to 3 percent target range.

``There are still legs supporting the Canadian dollar,'' said David Powell, currency strategist at research firm IDEAglobal in New York. ``The market is very optimistic that the central bank will raise interest rates twice this year.''

Exporters Squeezed

Canada's dollar has risen from a record low of 61.76 U.S. cents on Jan. 21, 2002, when oil was about $18 a barrel. Commodities including oil make up about half of Canada's exports.

The currency's 9.4 percent rally this year is squeezing exporters' profits, prompting provincial finance ministers to argue against rate increases.

``A 93 or 94 cent dollar has very severe consequences to the Ontario economy,'' Ontario Finance Minister Greg Sorbara said in an interview earlier this month. Provincial finance ministers are urging the Bank of Canada Governor David Dodge not to raise rates, Sorbara said.

Vancouver-based Canfor Corp., North America's fourth- biggest lumber producer by market value, posted a first-quarter loss of C$42.7 million. The company gets about 85 percent of sales in U.S. dollars.

A Statistics Canada report yesterday showed the nation's economic growth unexpectedly stalled in April, pushing the currency down from a 30-year high.

Zero Growth

The economy registered zero growth in April, after a 0.3 percent increase the prior month, Statistics Canada said. The median forecast in a Bloomberg News survey was for 0.2 percent growth in April. The economy expanded for six straight months before April.

The report ``suggests a strengthening currency has started to adversely affect the country's growth, especially the manufacturing sector, which may raise concern the BOC needs to keep rates on hold,'' said Robert Fullem, vice president of U.S. corporate currency sales at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York.

Canada's economy, the world's eighth-largest, grew at a 3.7 percent annual rate in the first quarter, the fastest since the third quarter of 2005. The Bank of Canada forecast that growth would slow this quarter, before accelerating in the second half of the year.

The yield on Canada's benchmark 10-year bond due June 2016 fell 10 basis points this week to 4.55 percent. It reached 4.76 percent this month, the highest since August 2004. The price, which moves inversely to yield, rose 74 cents to C$96.01.