Dollar tumbles versus loonie after Bank of Canada raises rates

NEW YORK: The US dollar hit its lowest level against the Canadian dollar in more than two years on Wednesday after the Bank of Canada surprised many by raising rates, while the greenback was modestly lower against a basket of major rivals.

The Bank of Canada (BoC) raised interest rates by 25-basis-points to 1 percent after a hike in July, putting Canada ahead of the curve in returning borrowing costs to more normal levels after they were slashed due to the 2007-2009 financial crisis.

Future rate moves "are not predetermined" and will be guided by economic data and financial market developments "as they inform the outlook for inflation," the bank said in a statement. The dollar fell as much as 1.9 percent against the loonie to C$1.2140, its lowest level since mid-June 2015.

"The market was a little bit less convinced that (the BoC) would go today," said Richard Franulovich, senior currency strategist at Westpac Banking Corp in New York. "A hike wasn't fully priced in."

Uncertainty over the potential impact of Hurricane Irma, tensions surrounding North Korea in the wake of the country's sixth and biggest nuclear test, and the outcome of a European Central Bank meeting on Thursday kept investors largely in a holding pattern.

The dollar was last roughly flat against the safe-haven yen at 108.78 yen after touching an eight-day trough of 108.47 yen in early trading.

The euro was last up 0.2 percent against the greenback at $1.1933. While remaining below a more than 2-1/2-year peak of $1.2069 touched last week, analysts said it was probable that the ECB would hint or announce a tapering of its bond-buying program on Thursday, a move which would likely boost the euro.

The euro also gained against the dollar after Federal Reserve Vice Chair Stanley Fischer announced his resignation, effective on or around Oct. 13.

The euro and loonie's gains resulted in the dollar index , which measures the greenback against a basket of six major rivals, last being down 0.2 percent at 92.076.

"The FX market is looking for direction from the ECB, and we believe that there is pressure building for the ECB to make some movement towards ending (quantitative easing)," said Douglas Borthwick, managing director at Chapdelaine Foreign Exchange in New York.

He said the euro could rise to around $1.25 by the end of September.