Loonie climbs to 13-year high

Dollar among most active as rate increases expected

The Canadian dollar rose to its highest in more than 13 years on rising energy and commodities prices and because traders expect a U. S. interest rate increase tomorrow will be matched a month later in Canada.

The currency strengthened against all 16 most active currencies yesterday.

Economic growth in North America will spur the Bank of Canada and the Federal Reserve to keep raising their benchmark rates to curb inflation, traders and economists said.

A Fed increase tomorrow “leaves the Bank of Canada open to raise interest rates” in October, said David Watt, economist at BMO Nesbitt Burns in Toronto. “ Along with oil, one of the reasons the Canadian dollar has been doing well recently has been the prospect of higher interest rates coming in Canada.”

Canada’s dollar closed at US85.57¢ , the highest since January, 1992, up from US84.80¢ late Friday. The currency racked up its biggest two-day gain since July 29 and Aug. 1.

Since the beginning of the year, the currency has appreciated against 14 of 16 major currencies and is up 2.8% against the U.S. dollar. It is 13% higher against the euro, near the strongest since June, 2002, according to Bloomberg data. Against the yen, the Canadian dollar rose 10.5% since the beginning of the year.

Higher rates make a country’s financial assets more attractive to foreign investors, who need the currency to buy the assets. A report yesterday showed an increase in foreign purchases of Canadian securities.

Canadian stocks rose a fourth day, led by energy and raw-materials companies, which account for two-fifths of the benchmark Standard & Poor’s/ TSX composite index.

“It’s a great story for Canada,” with commodity prices firm or rising, said Steve Butler, currency trader at Scotia Capital. Natural gas reached a record high and gold is trading at the highest since 1988.

Energy, metals and other commodities account for about 10% of Canada’s $1.1-trillion gross domestic product and 35% of its exports.

Crude oil rose US$4, or 6.4%, to US$67 a barrel on the New York Mercantile Exchange. It is 45% higher than a year ago.

“Gold and oil are both elements that are supporting the Canadian dollar,” said Stewart Hall, strategist at HSBC Securities in Toronto. Investors are also switching out of such markets as Germany and New Zealand where the politics and the ability of parties to form governing coalitions aren’t clear, Mr. Hall said.

Oil and the Canadian dollar have moved in the same direction about 78% of the time in the past three months, according to Bloomberg data.

Natural gas surged to a record US$ 12.66 per million British thermal units and gold rose 1.1% to US$464.65 an ounce.

Traders will be looking at the statement accompanying tomorrow’s Fed rate decision. Scotia’s Butler expects the Fed to raise its target by 25 basis point to 3.75% and “then it becomes a bit more of a wait-and-see issue” as the Fed assesses the impact of Hurricane Katrina. It would be the Fed’s 11th consecutive rate increase.

Meanwhile “the Bank of Canada has just begun increasing rates and that’s positive” for the Canadian dollar, Mr. Butler said.