Money world

Investors gave a sigh of relief at the U.S. Federal Reserve Board’s interest rate cut yesterday, but ultimately the move failed to lift stock markets out of the doldrums.

The Canadian dollar, too, surged by more than a cent after the Fed’s afternoon announcement, before settling back to a more modest gain.

On the Canadian side, the Bank of Canada is expected to follow suit with its own interest-rate reduction of either one-quarter or one-half of a percentage point in March.

"It isn’t so much that they’re playing copycat, but some of the same market forces that are compelling the Federal Reserve to cut interest rates will be felt on this side of the border," said Avery Shenfeld, senior economist at CIBC World Markets.

The blue-chip Dow Jones industrial average surged to a triple-digit gain in the afternoon, but fell again, losing 37.47 points on the day to close at 12,442.83. In Toronto, the S&P/TSX composite index finished at 12,998.21, down 48.22 points.

The dollar was up more than a half cent to close at $1.0068 (U.S.). Earlier, the loonie traded as high as $1.0131, its highest since Jan 4.

The federal funds rate in the U.S. is now at 3 per cent, compared with the Bank of Canada’s overnight lending rate of 4 per cent.

It’s the first time since June 2004 that the Fed’s rate is a full percentage point lower than its Canadian counterpart, and that’s likely to push the Canadian dollar higher.

The Bank of Canada repeated its promise of lower domestic interest rates yesterday, and said the economy was adjusting well to a stronger Canadian dollar.

Speaking to a parliamentary committee, senior deputy governor Paul Jenkins said the central bank was poised to provide more stimulus to help prevent problems in a slowing domestic economy.

But he gave no hint that Canada would match aggressive U.S 500 fast cash. rate cuts. The Bank of Canada had always assumed aggressive Fed moves were likely, he added.

Jenkins insisted the central bank had no formal target for the Canadian dollar and said the bank thought a floating exchange rate was crucial to help absorb economic shocks.

The bank’s next interest rate decision is March 4 and will be the first under the new governor, Mark Carney, who assumes office tomorrow.

"I think the Bank of Canada is dealing with a distinctly different economic situation," said Stewart Hall, market strategist with HSBC Securities Canada in Toronto.

"The headwinds that the U.S. economy faces are much greater than Canada. We have a housing situation that remains intact. While it’s moderating and maturing, it’s not imploding."

The Federal Reserve Board noted in its statement that "financial markets remain under considerable stress, and credit has tightened further for some businesses and households. Moreover, recent information indicates a deepening of the housing contraction as well as some softening in labour markets."

The Fed also sent reassuring signals that it would be prepared to cut rates further, if warranted. It noted that "downside risks to growth remain."

The U.S. rate cut "certainly does provide the economy with a bit of a backstop," said Pascal Gauthier, economist with TD Bank Financial Group. "Whether we see a marked slowdown or a mild recession, it does improve the chance that the U.S. economy kicks back up in the second half of 2008."

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