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Thursday August 27, 5:07 pm Eastern Time
Bank of Canada fails to support dollar with
rate hike
By Paul Simao
TORONTO, Aug 27 (Reuters) - The Bank of Canada reluctantly raised its
key interest rate by one full percentage point to 6.00 percent on Thursday in
a desperate but apparently futile bid to bolster market confidence in the
troubled Canadian dollar.
The central bank's stern medicine failed to support the Canadian dollar which slumped in heavy trading to a new record
low of 63.11 U.S. cents (C$1.5845) -- its lowest level ever.
The Canadian dollar, now dubbed the ''North American peso'' by some observers, has lost more than 11 percent of its
value against the U.S. dollar in the past six months as commodity prices slumped and turmoil swirled through
international markets.
The currency has fallen steeply in recent weeks to the lowest level since it was introduced in 1858, nine years before
Canada's confederation.
Bold currency traders derided Thursday's interest rate hike as insufficient to stem the Canada sell-off and a worldwide
rush to hold the safe haven U.S. dollar.
''The move is too little too late,'' said one currency trader at a major Canadian bank.
The central bank's inability to shore up the currency was an astonishing embarrassment and a sharp reversal of its
recent monetary policy.
The Bank of Canada last raised interest rates by 50 basis points in January in an equally unsuccessful attempt to bolster
the weakening currency.
Central bank Governor Gordon Thiessen had vowed not to hike rates again until the slowing Canadian economy broke
free of the shackles imposed by chaos in emerging markets.
Instead, the central bank has opted to bolster the Canadian dollar, known locally as the ''loonie,'' with a short-term
strategy of irregular but heavy intervention in currency markets.
It continued the intervention on Thursday, repeatedly buying the Canadian dollar as audacious currency traders drove
the unit ever lower. The central bank has spent an estimated $3.5-$4.0 billion out of its $20 billion in foreign reserves
defending the currency in August alone.
The bank all but admitted on Thursday that its strategy had failed.
''Today's increase in interest rates is aimed at providing support for the Canadian dollar in order to bolster confidence,
while preserving monetary conditions that will help to sustain the present non-inflationary expansion of the economy,''
the bank said in a statement accompanying the rate hike.
The rate rise also stoked fears that the slowing Canadian economy could stumble into a recession and ultimately end up
hurting the currency even more.
''The rate hike simply doesn't make a lot of sense,'' said Sal Guatieri, senior economist with Bank of Montreal.
''I'm really skeptical of whether this move in interest rates will provide long-term upward support for our currency. If
our economy does tumble a year from now, I think our currency will be much weaker than it is now,'' Guatieri said.
Canadian bond prices fell after the rate rise.
''The Bank of Canada is leaning against a hurricane. They can't halt the slide in the currency at all. The rate hike was
just a pure technicality, there had been such a significant tightening in policy led by the market before the Bank of
Canada hiked rates,'' said Harvinder Kalirai, a New York-based analyst at I.D.E.A.
The interest rate rise hit the Toronto stock market hard, sending the key TSE 300 stock index plummeting nearly seven
percent to 5752.00 and wiping millions off stock prices across the board.
Analysts worried the higher rates could hurt consumer confidence and draw investors out of high-yield blue chip stocks
into bonds.
''Everybody's operating in a vacuum. Suddenly everybody wants to get out the same door,'' said Irwin Michael,
portfolio manager at ABC Funds. ''There's a little bit of panic going on.''
The gloom gathering over global equity markets and foundering base and precious metals prices only added to
Toronto's woes. Gold slid sharply to fix at US$278.50 in London.
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