Dollar tops loonie as Canada trims key rate

NEW YORK — The dollar edged higher against the Canadian dollar Tuesday, closing above parity, after the Bank of Canada cut its key interest rate in an effort to contain inflation.

The Bank of Canada cut its overnight rate by a quarter percentage point to 4.25 percent, its first rate cut since 2004, citing global financial-market difficulties.

The dollar rose to buy 1.0149 Canadian dollars after the announcement, which was a reversal in the bank's economic outlook from July, when it increased the overnight rate to 4.5 percent and hinted at further increases to rein in Canada's fast-moving economy.

But that was before the Canadian dollar — called the "loonie," after the image of a loon on the $1 coin — reached parity with the U.S. dollar in September for the first time since 1976 and remained strong.

The Bank of Canada's decision was mainly a defensive strategy aimed at protecting exports, which are taking a hit due to a weaker U.S. dollar, according to David Gilmore, a partner at Foreign Exchange Analytics in Essex, Conn.

"The bank is worried about the subprime problem in the U.S., because Canadian banks and asset managers have exposure," Gilmore said. "If the Bank of Canada waited for the U.S. economy to slow even more, it would be too late. Their economy is dependent on the U.S., so they need to be ahead of the curve."

The announcement comes just a week before the U.S. Federal Reserve's decision on interest rates Dec. 11. Many investors believe the Fed's Open Market Committee will cut rates by another half percentage point to keep the U.S. economy, hurt by the subprime mortgage crisis, from sliding into a recession. Concerns over the huge U.S. trade deficit, which leaves more dollars in the hands of foreigners, have also weighed on the dollar.

Although lower interest rates can jump-start an economy, they can also weaken a currency as investors transfer funds to countries where they can earn higher returns.

Gilmore said it is likely other central banks will follow with rate cuts in coming months.

In trading against other currencies Tuesday:

The dollar came off an earlier rise against the euro after the European Union acknowledged that growth in the euro zone would increase by only 2 percent next year, news that could weigh on the European Central Bank at its meeting this week. The 13-nation euro currency bought $1.4766 Tuesday, up from $1.4672 late Monday but well off its record high of $1.4966 set Nov. 23.

In other trading, the dollar was lower against the Japanese yen, slipping to 109.90 yen from 110.47 late Monday in New York.