09/18/2013 09:22 EDT | Updated 11/18/2013 05:12 EST

Loonie heads higher as U.S. dollar weakens on Fed's decision not to taper

TORONTO - The loonie rallied Wednesday, as the U.S. dollar weakened on news that the Federal Reserve has decided to delay reducing its stimulus until it thinks the economy can support it.

The Canadian dollar climbed 0.70 of a cent to 97.83 cents U.S.

The U.S. central bank has been purchasing $85-billion in monthly Treasurys and mortgage bonds as part of an effort to stimulate the economy by keeping long-term loan rates low. The move has made borrowing money easier, and in turn, helped boost stock markets around the world.

Since May, Fed chairman Ben Bernanke has warned that the stimulus will eventually run out on signs that the economy is improving. The announcement was highly anticipated Wednesday following a two-day policy meeting of the Fed but, instead, Bernanke said the bank won't do any so-called tapering until it is convinced the economy is stronger.

Investors had predicted that the Fed would pull back somewhere between US$10 billion or US$15 billion monthly.

News of continued stimulus by the Fed sent stock markets and commodities higher, as the U.S. dollar fell against most international currencies.

"The U.S. dollar is just down against everything," said Colin Cieszynski, an analyst with CMC Markets Canada.

Gold markets were inititially lifted, but the gains were not sustained and December bullion closed down $1.80 to US$1,307.60 an ounce. The October crude contract gained $2.65 cents to US$108.07 a barrel while December copper was ahead six cents to US$3.28 a pound.

Earlier, Bank of Canada governor Stephen Poloz noted in a speech that Canada should be able to support stronger growth without stoking inflation — a key factor in the central bank's interest rate decisions.

The central bank has maintained its influential overnight interest rate at one per cent since September 2010.

"At the end of the day, that can support the Canadian dollar; it may not fall as much as some other currencies where central banks lean more towards easing," said Cieszynski.