06/19/2013 08:38 EDT | Updated 08/19/2013 05:12 EDT

Loonie slides, U.S. bonds, greenback advance on stimulus cutback expectations

TORONTO - The Canadian dollar closed sharply lower Wednesday after the U.S. Federal Reserve said that it would maintain the pace of a key stimulus program.

The central bank said after its two-day interest rate meeting that it will continue to purchase US$85 billion in bonds every month to keep long-term interest rates at record lows.

But the greenback gained ground and bond yields advanced as the central bank also offered a more optimistic outlook for the U.S. economy and job market, raising expectations that the Fed is moving closer to tapering its purchases.

The loonie was down 0.6 of a cent to 97.34 cents US. On Wednesday afternoon, the benchmark U.S. 10-year bond was yielding 2.35 per cent, up 15 basis points from before the Fed statement and up sharply from about 1.6 per cent at the beginning of May.

The Fed statement had been much anticipated as a cloud of uncertainty settled over markets after Bernanke first mentioned the possibility of tapering the U.S. central bank's monthly purchases of US$85 billion of bonds during congressional testimony on May 22.

Traders also took in the first major speech of the new governor of the Bank of Canada. Stephen Poloz used the speech to call on business to show confidence and start spending.

Poloz has only been on the job since June 3 and traders wanted to see how he potentially differs in tone from his predecessor, Mark Carney, who left the central bank's top job to take over as governor of the Bank of England.

He told a service club audience in Oakville, Ont., that the sustained recession knocked many exporting businesses out of operation, but that other areas of the economy were rebuilding.

"The good news is that the balance sheets of corporate Canada are healthy and the capacity to invest exists," said Poloz.

He added that the central bank’s long-standing target of low, stable inflation remains “sacrosanct.”

Other than that, "Poloz’s speech had little in the way of hints as to his monetary policy view or policy leanings, with the topic focusing on business confidence and an overview of the recovery," said CIBC economist Emanuella Enenajor.

"The speech did not touch upon or reiterate any previous monetary policy statements issued by the bank, suggesting that Poloz is steering clear of swaying markets one way or the other in advance of the next month’s policy decision and monetary policy report."

Commodity prices were mixed with the July crude contract on the New York Mercantile Exchange down 20 cents to US$98.24 a barrel amid a surprise gain in oil inventories in the U.S. last week. The U.S. Energy Information Administration said supplies rose by 300,000 barrels for the week, while analysts had forecast a decline of 1.1 million barrels.

July copper was one cent lower at US$3.14 a pound while August gold bullion rose $7.10 to US$1,374 an ounce.