The Canadian dollar strengthened against its U.S. counterpart on Tuesday as oil climbed to a six-month high and gold gained ground as a safe haven investment amid the possibility of Western military action against the Syrian government. While a flight to safety does not typically benefit the Canadian currency, stronger oil prices and reassuring comments from a Bank of Canada official pushed the Canadian dollar up 0.2 percent, erasing nearly a week of decline.
Canada is a major producer of both oil and gold. Both Brent and U.S. crude gained more than $3 a barrel as fears mounted that Western intervention could further destabilize the Middle East, which pumps a third of the world's oil. Wall Street stocks fell, with the Dow Jones industrial Average and the S&P 500 both off more than 1 percent, and Nasdaq down more than 2 percent. Investor nervousness was reflected in a jump of more than 15 percent on the CBOE volatility index, Wall Street's so-called fear gauge, in the last two days. A number of nations and groups, including Britain, France, Canada and the Arab League, joined the United States in urging a firm response to Bashar al-Assad's government in Syria and said the world shouldn't stand by as chemical weapons are used. However Russia, as Syria's key ally and arms supplier, opposes military action. While the Canadian currency is awaiting direction from economic growth data due out on Friday, Scotiabank Chief Currency Strategist Camilla Sutton said a speech by Bank of Canada Deputy Governor John Murray may have reassured investors that the end of quantitative easing by the U.S. Federal Reserve will have a positive impact for Canada. "What he highlights is that when the Fed began to ease it was a net positive for Canada and that the exact reverse happens when they begin to exit. However it will be in the context of an improving U.S. economy, which helps to offset it," Sutton said. "(CAD strength) is a host of different things, but it looks like as Bank of Canada Deputy Governor Murray was speaking we continued to strengthen." The Canadian dollar ended the North American session at C$1.0474 to the U.S. dollar, or 95.47 U.S. cents, up from Monday's finish of C$1.0503, or 95.21 U.S. cents. Whenever the Fed begins winding down its unconventional monetary policy, Murray said, it will take place in the context of a strengthening U.S. economy, and the benefits for the Canadian economy will outweigh any risks. "The improving underlying strength of the U.S. economy should more than compensate for the drag from higher interest rates," Murray said in a speech. "Stronger external demand, coupled with downward pressure on our currency and support for commodity prices from a global economic recovery, will provide the lift." The Fed has said it plans to start reducing its massive bond purchase program by yearend, with an eye toward drawing it to a close by mid-2014. The Fed's $85 billion a month in purchases of U.S. Treasuries and mortgage-backed securities has been aimed at driving down long-term interest rates and has been credited with an infusion of liquidity that has benefited global financial markets. Canadian government bond prices were higher across the curve, with the two-year bond rising 4.1 Canadian cents to yield 1.165 and the benchmark 10-year bond climbing 66 Canadian cents to 2.569 percent.
Source: Reuters

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