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Canadian dollar rises, data shows inflation remained weak in December

Loonies are pictured in Vancouver, Sept. 22, 2011. THE CANADIAN PRESS/Jonathan Hayward

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Loonies are pictured in Vancouver, Sept. 22, 2011. THE CANADIAN PRESS/Jonathan Hayward

TORONTO - The Canadian dollar closed higher Friday as price data showed inflation continues to be weak.

The loonie was up 0.21 of a cent at 90.31 cents US as Statistics Canada said the annual inflation rate for December increased to 1.2 per cent on an annual basis compared with 0.9 per cent in November, largely because of higher gasoline prices. The reading met economists' forecasts.

The rise came amid a volatile day on financial markets with investors worried about sharp drops in the values of currencies in several emerging markets, including Turkey, Russia, South Africa and Argentina.

These drops were sparked by moves by the U.S. Federal Reserve to cut back on its massive bond purchases, a key stimulus measure that fuelled a stock market rally and also kept long-term rates low. But U.S. bond yields have risen as the Fed moves to taper its purchases, meaning investors are taking their money out of emerging markets.

"Pressure in the more vulnerable emerging market capital markets continues and has attracted significant global attention driving risk aversion higher on fears of possible contagion outside of the epicentres," observed Camilla Sutton, chief FX strategist, managing director, Scotiabank Global Banking and Markets.

"Argentina, Turkey and South Africa are under tremendous pressure, which has yet to ease."

The rout in emerging market assets followed signs that manufacturing was contracting in China, a major driver of global economic growth.

The Canadian currency has had another tough week, down 0.8 of a cent after the Bank of Canada left its key interest rate unchanged Wednesday and noted that inflation has been lower than expected and won't return to its ideal target of two per cent until 2016.

The low inflation rate means the central bank isn't under any pressure to push up Canadian interest rates, a move that would tend to strengthen the dollar by attracting more foreign investments.

On the commodity markets, the March crude contract on the New York Mercantile Exchange lost 68 cents to US$96.64 a barrel.

Risk averse traders sent February gold up $2 to US$1,264.30 an ounce while March copper edged a cent lower to US$3.27 a pound.

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