Loonie eyes 130-year high if Fed makes big rate cut

By Frank Pingue - Analysis

TORONTO (Reuters) - The Canadian dollar could reach its highest level against the greenback in nearly 130 years if the Federal Reserve shocks currency markets this week with a bigger than expected rate cut or signals further easing.

After hitting a 47-year high on Monday, the Canadian dollar is now just over a penny away from reaching its highest level since the late 1800s.

The market has fully priced in a 25 basis point cut to the U.S. fed funds rate on Wednesday, a move that would make key U.S. and Canadian interest rates equal for the first time since February 2005, at 4.50 percent.

But if the U.S. central bank signals another rate cut in December, or if it goes against expectations and chops rates by 50 basis points, it could pull the rug out from under an already unsteady U.S. dollar and clear the way for the Canadian currency to shoot higher.

"Certainly a larger than expected cut would lift the loonie and all other currencies against the beleaguered greenback," said Sal Guatieri, senior economist at BMO Capital Markets.

"As well, if they just cut 25 basis points and the statement hints at more cuts to come that would certainly support the currency as well."

Since falling to its all-time low versus the U.S. dollar in January 2002, the Canadian dollar has rallied sharply given a slew of factors that include lofty commodity prices, a robust domestic economy and merger-related interest.

Last month, the currency shot through parity with the U.S. dollar for the first time since 1976 and it has not shown any signs of slowing down.