Dollar tumbles versus loonie after Bank of Canada raises rates

U.S. and Canada Dollar notes are seen in this June 22, 2017 illustration photo. REUTERS/Thomas White/Illustration

NEW YORK (Reuters) - The U.S. dollar hit a multiyear low against the Canadian dollar on Wednesday after the Bank of Canada surprised many by raising interest rates, while rising against the safe-haven yen after President Donald Trump said he agreed with lawmakers to pass an extension of the U.S. debt limit.

The Bank of Canada (BoC) raised interest rates by 25 basis points to 1 percent after a hike in July, putting Canada ahead of the curve in returning borrowing costs to more normal levels after they were slashed due to the 2007-2009 financial crisis.

The dollar fell as much as 1.9 percent against the loonie to C$1.2140, its lowest level since mid-June 2015, and was last on track for its biggest percentage decline against the loonie in nearly two months. “The market was a little bit less convinced that (the BoC) would go today,” said Richard Franulovich, senior currency strategist at Westpac Banking Corp in New York. “A hike wasn’t fully priced in.”

The dollar jumped more than half a percentage point against the Japanese yen to 109.39 yen, rising off an eight-day trough touched in early trading of 108.47 yen on the news of agreement on the debt ceiling. The greenback was last on course for its biggest one-day percentage gain against the yen in more than two weeks.

Trump, siding with Democrats over his fellow Republicans, said he agreed with lawmakers to pass an extension of the U.S. debt limit until Dec. 15, potentially avoiding an unprecedented default on U.S. government debt.

“The biggest news, I think, was the announcement that they’re going to have a three-month deal,” said Steven Englander, head of research and strategy at Rafiki Capital Management in New York. “The reason the yen is responding and bond yields are responding is that it’s risk-positive.”

The euro was last roughly flat against the dollar at $1.1910 ahead of the outcome of a European Central Bank meeting on Thursday. The euro pared earlier gains against the dollar after Bloomberg reported that the central bank was unlikely to reach a decision on reducing its bond purchases before October, citing euro-area officials familiar with the matter.

The dollar index, which measures the greenback against a basket of six major rivals, was last roughly flat at 92.291.

Reporting by Sam Forgione; Editing by Marguerita Choy and Jonathan Oatis