Canada's Dollar Falls the Most in 6 Weeks on Outlook for Rates

May 1 (Bloomberg) -- The Canadian dollar fell the most in more than six weeks on speculation the weakening economy will force the central bank to further cut borrowing costs as the U.S. Federal Reserve may stop reducing its key rate. Canada's dollar declined versus 14 of the 16 most-traded currencies after a report yesterday showed the economy contracted in February and Bank of Canada Governor Mark Carney said he'll probably need to lower interest rates again after four reductions since December. The Fed reduced its key rate by a quarter-percentage point to 2 percent yesterday. ``A combination of factors is suggesting that the Canadian dollar will decline,'' said Tom Fitzpatrick, global head of currency strategy at Citigroup Global Markets Inc. in New York. ``You've Carney, who is taking a more dovish tone, and you've a scenario where the U.S. dollar is generally strengthening. The outcome could be a move lower in the Canadian dollar.'' Canada's dollar fell 1.1 percent to C$1.0192 per U.S. dollar at 3:29 p.m. in Toronto, from C$1.0079 yesterday. It was the biggest decline since March 19, when the currency depreciated 2.2 percent as commodity prices tumbled. One Canadian dollar buys 98.11 U.S. cents. Citigroup today advised its clients to buy the U.S. dollar against Canada's currency with a target of C$1.0870 in the next two to three months. The currency will weaken to C$1.06 by the end of this year, according to the median forecast in a Bloomberg survey of 37 analysts. Bank of Canada The Canadian central bank cut its key rate a half- percentage point to 3 percent on April 22, to revive an economy that's growing at its slowest pace in 16 years, and signaled more reductions may be needed. A government report yesterday showed the nation's economy unexpectedly contracted in February, led by manufacturing and wholesaling, another sign that a U.S. economic slowdown and global credit shortages will curb production this year. Gross domestic product, the sum of all goods and services produced in Canada, shrank 0.2 percent, the second decline in three months, Statistics Canada said. Economists had predicted a 0.2 percent expansion after growth of 0.6 percent in January. `Refuted the Notion' ``The GDP data have thoroughly refuted the notion that Canada's economy is decoupling from the U.S.,'' wrote David Wolf, Toronto-based chief strategist at Merrill Lynch Canada Inc., in a note to clients today. ``The Canadian economy hasn't been able to outperform the U.S. economy at all over the past year,'' he wrote. The Canadian currency, nicknamed the loonie after the image of the bird on its one-dollar coin, rose 1.7 percent last month. The currency is down 2 percent against the U.S. dollar so far this year. ``The U.S. weakness is weighing on the Canadian economy,'' said Camilla Sutton, a currency strategist at Scotia Capital Inc. in Toronto. Fitzpatrick said the Canadian currency will also suffer as the price of crude oil declines from its peak. Crude oil for June delivery fell 89 cents, or 0.8 percent, to $112.57 a barrel after reaching a record $119.93 on April 28, as the U.S. dollar rose to a five-week high against the euro, curbing the appeal of commodities. Gold dropped to a four-month low. Commodities account for about half of Canada's exports. `Significantly Overvalued' ``The Canadian dollar is significantly overvalued,'' said John Shin, a currency strategist at Lehman Brothers Holdings Inc. in New York. ``The Bank of Canada will continue to cut rates through this summer, even if the Fed goes on hold. This is a deliberate attempt on the part of the bank to soften up the currency.'' Lehman predicts the Bank of Canada's key interest rate will decline to 2.25 percent this year, while the currency will fall to C$1.07 by the end of the second quarter. The yield on Canada's benchmark 10-year government bond fell 3 basis points, or 0.03 percentage point, to 3.56 percent. The price of the 4 percent security due June 2017 rose 19 cents to C$103.39. It was the fourth straight day of gains, the longest winning streak since the period ended March 17. The bond's yield is down 43 basis points so far this year. The yield advantage of the benchmark 10-year U.S. Treasury note compared with comparable-maturity Canadian government bonds rose 4 basis points to 18 basis points, the widest since Oct. 16, 2007. Canadian government bonds have returned 3 percent in 2008, according to Merrill Lynch & Co. index statistics. U.S. Treasuries during the same period returned 2.6 percent.