The Canadian dollar took a tumble in Toronto foreign exchange trading today despite a weekend increase in Canadian interest rates intended to help the weak currency.
The dollar finished at 85.76 cents in U.S. funds, down from 85.97 cents on Friday. This means a U.S. dollar costs more than $1.1640 in Canadian funds.
On Sunday, Bank of Canada Governor Gerald Bouey announced an increased in the bank rate -- the central bank's charge on its infrequent loans to chartered banks -- to a record 11.75 percent from 11.25 percent. The chartered banks posted a similar increase in their prime rates -- the interest they charge their largest and most-credit-worthy customers.
Bouey said the bank rate increase is intended to make it more attractive for investors here and abroad to keep their money in Canadian funds. The move by the central bank follows a similar increase in the corresponding U.S. Federal Reserve rate late last week.
High interest rates have been a key weapon in the defense of Canada's weak dollar. Since the beginning of 1978, the bank rate has been increased more than 56 percent from 7.5 percent to 11.75 percent.
Bank rate increases signal the direction in which Ottawa wants Canadian interests rates to move. The chartered banks usually respond quickly to these signals.
Canadian banks boosted non-checking savings deposit rates to 10 percent from 9.5 percent. Other loan and deposit rates expected to be adjusted in the near future.
With mortgage loan demand weak, only one lender has increased its conventional mortgage rate to 11.75 percent from 11.5 percent. But some observors argued that the increase might not stick because of slack demand.
Existing mortgages and consumer loans on scheduled repayments are not affected by the rate increase.
One currency trader suggested that the timing of the bank rate increase indicates some possible negative aspects in the Canadian dollar's future.
He says federal officials may have seen preliminary June merchandise trade figures, and the figures may be poor.
Canada's merchandise trade performance so far this year has been disappointing. Ottawa counts on a big merchandise trade surplus to help offset the chronic defecit in payments to investors abroad and to finance foreign travel by Canadians. The merchandise surplus last year was a record $3.52 billion but the overall deficit was $5.2 billion.