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Canadian dollar firms after Fed, looking to GDP data

TORONTO: The Canadian dollar closed firmer at C$1.5117 ($0.6615) on Tuesday, nudged higher after the U.S. Federal Reserve left interest rates unchanged, but still pressured by belief the Bank of Canada could trim Canadian rates in the near term.

The Federal Open Market Committee's Tuesday meeting produced little news for forex markets to chew on, although Canada's dollar reacted warmly to the Fed's decision to maintain its neutral policy stance.

The Canadian dollar's slight gains could reverse to losses, however, with key Canadian GDP data due on Wednesday expected to provide clues to future BOC policy direction.

"The Fed's decision to leave rates unchanged and maintain a neutral policy stance may increase the odds of the Bank of Canada cutting interest rates in the near term," said Sal Guatieri, senior economist at Bank of Montreal.

"The BOC's big concern now is whether (Canadian) inflation gets back into its 1 to 3 percent target band. There is maybe a 35 percent chance the Bank will cut rates a quarter point," he added.

Speculation the Bank of Canada would trim interest rates has gathered steam since Canada's core inflation rate slipped below the bank's target range. If Canada's January GDP report shows an increase below the expected 0.3 percent or 0.4 percent gain, that speculation could drive Canada's currency softer.

"If we get a very weak (GDP) number, or even a decline, that could encourage the Bank of Canada to move the rates," Guatieri said.

Traders said flows were generally thin ahead of the market holiday on Friday for Good Friday. Canadian and U.S. GDP numbers will be release on Wednesday.

On the crosses, Canada's dollar was slightly firmer against the yen at 79.66 from 79.36, hovering around three-week highs. The Canadian dollar was stronger against the euro at C$1.6168 from C$1.6242. The ongoing conflict in Yugoslavia and suspicion the European Central Bank could cut rates continued to weigh on the currency.-Reuters