Canada’s dollar is emerging as the Group of Seven currency with the most at stake as traders debate the effect of the U.S. Federal Reserve’s decision today to reduce its unprecedented monetary stimulus.
The loonie, which extended declines versus the greenback after the Fed announcement, and U.S. 10-year Treasury notes yields are the most inversely correlated since August 2004, increasing faster in 2013 than any other G-7 peer apart from the U.S. dollar. That means any rise in U.S. yields resulting from the Fed’s decision to taper its monthly bond purchases may weaken Canada’s currency, which is already down 7 percent this year.
The Canadian dollar is particularly sensitive to Fed policy because the countries are each other’s largest trading partners. The correlation increased as the U.S. considered reducing stimulus and the Bank of Canada stepped back from a pledge to move interest rates higher.
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