Wednesday, Sep 08, 2010

By Bradley Davis and Karen Johnson

Of DOW JONES NEWSWIRES

NEW YORK (Dow Jones)--The Canadian dollar gained against its U.S. counterpart Wednesday, after the Bank of Canada announced its third-consecutive interest rate increase.

The Bank delivered a cautious tone as it announced the 25-basis-point rate increase, saying, "Any further reduction in monetary policy stimulus would need to be carefully considered in light of the unusual uncertainty surrounding the outlook."

The rate increase hoists the Bank's overnight target rate to 1.00%.

In June, the Bank of Canada became the first central bank in the Group of Seven industrialized nations to raise interest rates since the global economic crisis took hold two years ago.

The U.S. dollar was at C$1.0426 following the announcement, from C$1.0490 just before. It was at C$1.0475 late Tuesday.

Wednesday morning, the euro was at $1.2695 from $1.2689 late Tuesday, according to EBS via CQG. The dollar was at Y83.93 from Y83.80, while the euro was at Y106.55 from Y106.33. The U.K. pound was at $1.5435 from $1.5350. The dollar was at CHF1.0122, unchanged from late Tuesday.

The ICE Dollar Index, which tracks the greenback against a trade-weighted basket of currencies, was at 82.769 from 82.815.

Market expectations were largely biased in favor of the 25-basis-point rate increase from the BOC. However, with growth in Canada and the U.S. recovery both underperforming in recent economic indicators, analysts said the bank could justify a move to the sidelines this time around.

Separately, the dollar fell to a fresh 15-year low against the yen overnight before rebounding slightly Wednesday as investors brushed aside an escalating war of words by Japanese officials directed at the rising yen.

The dollar fell to a low of Y83.34, compared with Y83.80 late Tuesday in New York before retracing some of its losses.

"Not surprisingly, more rhetoric from Japanese policy makers has been unleashed, though the legitimacy of such talk is still in question until we see some actual action," said Sacha Tihanyi, currency strategist at Scotia Capital in Toronto.

Japan Finance Minister Yoshihiko Noda was the latest official to warn markets that Japan was ready to act, specifically raising the specter of intervention for the first time.

"We will take decisive steps--which of course include intervention--when it becomes necessary," Noda said.

Analysts said the comments showed greater seriousness among Japan's authorities toward the possibility of direct intervention, something they haven't done since 2004. But there was still skepticism as to whether intervention would actually happen.

-By Bradley Davis, Dow Jones Newswires; 212-416-2654; bradley.davis@dowjones.com

(Don Curren in Toronto and Kosaku Narioka in Tokyo contributed to this article)

(END) Dow Jones Newswires

September 08, 2010 09:15 ET (13:15 GMT)