Loonie down ahead of Fed announcement, traders hope for clarity on tapering

TORONTO - The Canadian dollar closed sharply lower Wednesday as the U.S. currency strengthened after the Federal Reserve said it plans to start winding up its massive bond purchases starting in January.

The loonie fell 0.7 of a cent to 93.55 cents US.

The central bank said at the end of its two-day interest rate meeting that it would cut its US$85 billion of bond purchases by $10 billion — half Treasuries, half mortgage-backed securities — starting in January.

"The Fed surprised again, having not tapered in September when the market was nearly fully prepared for it, and choosing to go ahead when only a minority were expecting it," said CIBC World Markets chief economist Avery Shenfeld.

It will make further decisions on tapering based on how economic data looks, particularly in regards to employment and inflation.

The Fed also went to some pains to assure financial markets that short-term rates aren't going up any time soon. It says it plans to hold its key short-term rate near zero “well past” the time when unemployment falls below 6.5 per cent.

Speculation had grown recently that a string of strong economic data might persuade the Fed to use this meeting to announce it would begin cutting back on asset purchases. Those purchases have kept long term rates low and encouraged investors to put their money into stocks, which has in turn supported a strong rally on equity markets this year.

Commodity prices were generally higher with the January crude contract on the New York Mercantile Exchange up 58 cents to US$97.80 a barrel amid data showing oil inventories rose 2.94 million barrels last week, less than the four million barrels that analysts had expected.

March copper was unchanged at US$3.32 a pound.

February gold gained $4.90 to close at US$1,235 an ounce.

Elsewhere on the economic front, U.S. housing starts came in better than expected for November, rising to an annual rate of 1.09 million, much higher than the 952,000 that economists had expected. It was also the fastest pace since February 2008, just a few months after the U.S. recession began.

German business confidence has edged higher amid hopes of faster economic growth in the new year. The Ifo institute’s closely watched confidence index climbed to 109.5 points this month from 109.3 in November.

The German economy, Europe’s biggest, is expected to see growth accelerate next year after only a modest increase in output in 2013.