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Loonie up ahead of budget, Fed chair signals continued stimulus withdrawal

Canadian dollars (loonies) are pictured in Vancouver, Sept. 22, 2011. THE CANADIAN PRESS/Jonathan Hayward

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Canadian dollars (loonies) are pictured in Vancouver, Sept. 22, 2011. THE CANADIAN PRESS/Jonathan Hayward

TORONTO - The Canadian dollar closed higher Tuesday while traders looked ahead to the release of the federal government's new budget.

The loonie was ahead 0.31 of a cent to 90.77 cents US as the U.S. dollar backed off amid the other major market event of the day — congressional testimony by the new chair of the Federal Reserve.

The dollar closed for the day before Finance Minister Jim Flaherty presented the budget to the Commons shortly after the market close.

The Conservative government’s march toward balanced budgets includes an estimated $7.4 billion in savings over six years from cutting public-service compensation.

By comparison, the budget estimates only $1.8 billion in savings from various other measures.

At the core of the compensation plan proposal is a change to the health benefits available to retired bureaucrats.

Meanwhile, Fed chairwoman Janet Yellen said that she expects a "great deal of continuity" with her predecessor, Ben Bernanke.

Yellen signalled that she supports his view that the economy is strengthening enough to withstand a pullback in stimulus but that rates should stay low to fuel further growth.

So far, the Fed has moved twice over the last two months to cut its bond buying program by a total of US$20 billion to $65 billion and analysts generally expect the Fed to continue cutting by $10 billion every meeting.

Yellen’s remarks to the House financial services committee had been highly anticipated, particularly with last week's U.S. employment data for January falling well short of expectations and fresh worries about how emerging markets are dealing with Fed tapering.

Traders are also braced for what could be some further negative news from China after data last week showed the manufacturing sector in the world's second-biggest economy still expanding, but at a slower pace.

Meagre trade growth is expected when import and export data is released Wednesday. Inflation data comes out the next day and Barclays Research said it expects inflation to moderate to 2.3 per cent year over year in January from 2.5 per cent in December, thanks in large part to lower food inflation.

On the commodity markets, March crude on the New York Mercantile Exchange edged 12 cents lower to US$99.94 a barrel.

March copper was down a cent to US$3.21 a pound while April gold bullion moved ahead $15.10 to US$1,289.80 an ounce.

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