BMO Financial Group
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BMO Financial Group

July 21, 2011 10:40 ET

Rate Hikes to Keep Loonie on the Rise-BMO Economics

Monthly average to reach $1.05 U.S. by early 2012

TORONTO, ONTARIO--(Marketwire - July 21, 2011) - With the Canadian dollar reaching its highest level in almost four years at US$1.06 this morning, and within striking distance of its modern-day high of $1.10, BMO Economics has projected that the coming interest rate hikes, recently signalled by the Bank of Canada, will continue to keep the loonie strong.

"Against a background of firm commodity prices and continued global diversification flows to the relatively safe harbour of Canadian bonds, we look for the loonie to stay close to around US$1.05 even by the early part of 2012, before Fed rate hikes start to kick in," said Douglas Porter, Deputy Chief Economist, BMO Capital Markets.

Mr. Porter also noted that the Bank of Canada is now accepting that the major competitive issue facing Canadian business is in fact the currency. "However, an even stronger loonie is a cost the Bank seems willing to accept, given that a rising currency is seen as a key ingredient needed to help restrain core inflation in coming months."

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