Resource Investor finds something to question about WGC''s bullion fund

Section:

By Joshua Krongold
Bloomberg News Service
Tuesday, December 7, 2004

http://www.bloomberg.com/apps/news?
pid=10000082&sid=aqPFgZJidwjE&refer=canada

NEW YORK -- Canada's dollar fell to a two-week low
and bonds rose after the Bank of Canada refrained
from increasing its 2.5 percent target interest rate
and dropped its pledge to lift the rate "over time."

The currency is about 7 percent stronger since the
bank started raising rates in September, reaching
a 12-year high two weeks ago. Today the bank
said the current value of the Canadian dollar would
have "a dampening effect" on demand for Canadian
goods. Higher interest rates can spur gains for the
currency, as investors snap up Canadian debt
securities.

"The statement was probably as dovish as they
possibly could have been" about rates, said
Steven Butler, senior currency trader in Toronto
at Scotia Capital, a unit of Canada's third-biggest
bank by assets. "Obviously it got a few people
concerned about the currency and some investors
exited" positions betting on a rise.

Against the U.S. dollar, the Canadian currency
reversed an earlier gain and fell 0.5 percent to 82.98
U.S. cents at 9:46 a.m. in Toronto. It closed at 83.38
cents yesterday. One U.S. dollar buys C$1.2069.
The currency earlier climbed to 83.83 cents. It has
declined since surging to 85.32 cents on Nov. 26,
the highest since January 1992.

The 3.25 percent bond due in December 2006 --
which is more sensitive to monetary-policy
expectations than longer-dated debt -- rose 5 cents
to C$100.71, according to bond broker Mouvement
Desjardins. Its yield fell about 3 basis points to 2.88
percent, a level it also reached after Dec. 3.

The 5 percent bond due in June 2014 rose 11 cents
to C$105.36. Its yield fell 1 basis point to 4.30
percent, or 142 basis points more than two-year
maturities. The yield difference, up from 121 on
Nov. 8, has widened on expectations the central
bank will remain on hold.

Traders pared bets on a rate increase before today's
announcement after reports last week showed a
slowdown in job growth and gross domestic product.
The slowdown suggested Canada's export-reliant
economy is suffering from the currency's recent
advance. Exports represent 40 percent of the
economy.

Most of the 34 economists surveyed by Bloomberg
News expected the bank to leave its benchmark rate
unchanged.

Bank of Canada Governor David Dodge said last
month that policy makers will monitor the currency's
economic impact when setting rates. The
manufacturing sector lost 18,000 jobs in November
and faces a challenge as a rising currency makes
exports cost more abroad, Statistics Canada said
last week.

The yield on the bankers' acceptance futures
expiring Dec. 13, an interest-rate contract, was
2.585 percent, down from 2.895 percent on Nov. 9.
It dropped 3.5 basis points, or 0.035 percentage
point, after today's decision.

Bankers' acceptance futures settle at Canada's
three-month lending rate, which has averaged 19
basis points above the central bank's current rate
target since Bloomberg started tracking the gap in
1992.

"If the bank doesn't raise rates and suggests there
is room to pause," it will trigger a decline in the
Canadian dollar, said Omer Esiner, a currency
analyst at Ruesch International in Washington,
before the announcement.

The Bank of Canada lifted its rate Sept. 8 -- the
first in 17 months -- and Oct. 19, to 2.5 percent,
after a second-quarter GDP report showed the
fastest economic growth in two years.
Lower-than-forecast quarterly GDP data released
Nov. 30 showed the first export decline in a year.

By comparison, the Federal Reserve's target
overnight rate is 2 percent. The Fed next week is
expected to raise the rate a quarter point to 2.25
percent, according to the median estimate among
81 economists surveyed by Bloomberg.

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