BUSINESS

Loonie at 13-month high, greenback weakens as Fed launches further stimulus

09/13/2012 08:44 EDT | Updated 11/13/2012 05:12 EST
TORONTO - The Canadian dollar shot up almost a full US cent to a 13-month high Thursday as the U.S. currency weakened after the U.S. Federal Reserve launched another round of economic stimulus.

The loonie jumped 0.87 of a cent to 103.27 cents US after the U.S. Federal Reserve said it will spend $40 billion 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.

The loonie has surged in value against the U.S. dollar since last week, up 2.35 cents since last Wednesday's close, 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.

The U.S. central bank will also continue to buy bonds with long maturity horizons under its so-called Twist program, leaving them buying a total of US$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.

That could take awhile as the Fed also has lowered its outlook for growth this year, saying growth will be no stronger than two per cent this year, down from a 2.4 per cent forecast in June.

However, it also expects growth to accelerate next year as much as three per cent, up from June’s forecast of as much as 2.8 per cent. For 2014, the Fed projected growth between three and 3.8 per cent.

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.

In two previous bond-buying programs, the Fed bought more than US$2 trillion 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 $1.30 to US$98.31 a barrel.

December copper was up two cents at US$3.71 a pound while December bullion gained $38.40 to US$1,772.10 an ounce.