By JONATHAN HARRIS and JON HARRISONReuters,CANADA (Reuters) – Canada’s Canadian dollar dropped to a fresh three-week low on Friday after the Bank of Canada said its key interest rate was likely to rise this year to a record of 0.25 percent.
Canada’s lunar rate, which has been steady at 0.5 percent since March, will likely rise again this year, with the Bank deciding next month on a rate of 0 to 1 percent, according to an estimate by the Bank’s chief economist.
“There is an expectation that the Bank will raise rates at some point in the year, and that’s where we’re likely to be in the coming months,” said David Madani, head of fixed income at Scotia Capital in Toronto.
Canada will have to rely on U.S. dollars, which have weakened by around one-third against the euro in recent weeks, to meet its $2.4 trillion import and export spending needs this year.
U.S.-Canadian dollars are trading at around 0.33 to the U.K. dollar, down about a third since the beginning of the year.
“We expect the dollar to trade lower in the near term as a result of the Fed’s move to increase rates, which are likely to make dollar-denominated commodities more expensive for the world market,” Madani said.
The loonies have gained about 12 percent since June, when they were trading near all-time highs of $1.2680.
The currency dropped to around 0:50 p.m.
(2050 GMT) after hitting its highest level in five years, touching a four-year low.
The central bank, which cut its benchmark interest rate last week, has been tightening policy to boost growth and inflation.
It expects to raise rates again in early 2017, after which it would cut its forecast for 2017 by a further 0.2 percentage points.
“This is a key indicator for when we might see the U,S.
dollar weaken in the medium term and potentially lead to an inflationary shock,” Madansi said.($1 = 1.7586 Canadian dollars)(Reporting by Andrew Hay; Editing by Mark Heinrich)