03/08/2012 09:16 EST | Updated 05/08/2012 05:12 EDT

Loonie up as Bank of Canada leaves rates unchanged, sees improvement in economy

TORONTO - The Canadian dollar closed higher after the Bank of Canada said it was keeping its key interest rate unchanged at one per cent while noting that economic conditions have improved over the past few weeks.

The loonie was up 0.72 of a cent to 100.9 cents US as the bank cited "tentative signs of stabilization in European bank funding and sovereign debt markets."

It also noted that conditions in global financial markets are better while risk aversion has decreased. But the bank cautioned that "the global economy is still expected to grow below its trend rate as the deleveraging process in advanced economies proceeds."

Canada too has seen conditions brighten somewhat, with the bank predicting the economy is growing faster in the first three months of this year than in its previous call for a 1.8 per cent advance.

The assessment raised hopes for some that the central bank could hike interest rates later in the year, although others expect they'll be steady into 2013.

Higher rates on Canadian government and corporate bonds would attract more foreign investment and boost demand for the loonie, especially if U.S. rates remain unchanged as expected.

The currency was also supported by commodities which moved higher amid growing hopes that Greece can get enough support for a crucial bond swap.

The April crude contract on the New York Mercantile Exchange was ahead 42 cents to US$106.58 a barrel. Prices shot up almost US$1.50 Wednesday following a report showing a lower than expected rise in U.S. inventories last week.

May copper rose two cents to US$3.79 a pound.

Bullion also made gains, up $14.80 to US$1,698.70 an ounce.

There was rising confidence that Greece got enough private creditors on side by a deadline of mid-afternoon Thursday to complete a debt swap that would see those investors exchange their Greek bonds for new ones with a 53.5 per cent lower face value, lower interest rates and longer maturity dates. The hope is that by lowering the amount of debt it has to repay, Greece can gradually return to growth.

If not enough investors agree and the bond deal fails, the country could default on its debt in less than two weeks, prompting renewed turmoil in financial markets and knocking confidence in the global economic recovery.

A government official said participation in the bond swap deal by banks, pension funds and other investors holding more than half the €206 billion total debt in public hands was already above 75 per cent. New legislation will allow Greece to force holdouts into accepting the deal if overall participation is not high enough.

An official announcement on participation was expected early Friday morning.

Economic data also showed that Canadian housing starts picked up during February on higher activity in apartments, condos and retirement housing. Canada Mortgage and Housing Corp. said that the seasonally adjusted annual rate of starts was 201,100, up from 198,100 in January.

And in the U.S., the Labour Department said that applications for unemployment benefits rose last week slightly more than expected, although the four-week average remained near a four-year low.