Canada's Dollar Rises on Manufacturing Expectations, U.S. GDP

Canada's dollar approached a seven-
month high, after a government survey showed factories expect
increased production in the second quarter and the U.S. gross
domestic product started the year below economists'
expectations.

Canada's currency is headed for its sixth straight weekly
gain after a quarterly survey of 3,000 managers by Statistics
Canada in Ottawa showed 22 percent of manufacturers predicted
higher output, a 4 percentage point rise from January.

``That report was a positive for the Canadian dollar,''
said Sal Guatieri, senior economist at BMO Capital Markets in
Toronto.

The Canadian dollar has gained 0.7 percent this week, to
89.65 U.S. cents at 12:11 p.m. in Toronto, rising from 89.15
U.S. cents yesterday. Earlier today, the dollar reached 89.85,
the highest since Sept. 29. One U.S. dollar buys C$1.1155.

The Canadian dollar strengthened against all 16 most
actively traded currencies.

The production report added to speculation the Bank of
Canada may need to raise its benchmark lending rate between
banks later this year to curb inflation. It has stood at 4.25
percent since May 24.

The central bank said in a statement earlier this week that
inflation will peak at about 2.8 percent in the fourth quarter,
barely within its 1 percent to 3 percent target band.

A separate report released this morning from Washington
showed U.S. gross domestic product, the sum of all goods and
services produced, grew at an annual rate of 1.3 percent from
January through March, slower than the 2.5 pace in the previous
Quarter, the Commerce Department reported. Economists surveyed
by Bloomberg expected a 1.8 percent increase. Canada ships 80
percent of its exports to the U.S.

Fed Speculation

The report pushed the U.S. dollar to a record low against
the euro and boosted its Canadian counterpart on speculation
that the Federal Reserve may cut interest rates to stimulate the
world's largest economy.

``Odds are tilting towards lower rates in the U.S. and
higher rates in Canada,'' said Marc Levesque, chief fixed income
and foreign exchange strategist at TD Securities in Toronto.
``The rate convergence story is overwhelmingly Canada
positive.''

Bank of Canada policy makers on April 24 kept the benchmark
lending rate unchanged for the seventh time, while the Fed has
held its target rate for overnight lending between banks at 5.25
percent since June.

Narrowing Yield Gap

The yield advantage of 10-year U.S. Treasury notes over
similar-maturity Canadian bonds was 47 basis points, down from
50 basis points yesterday. A narrowing yield gap boosts the
allure of Canadian dollar-denominated assets.

``The sense of the market is the next move for the Fed is
down, that's a positive for the Canadian dollar,'' Guatieri
said.

The currency also got a boost earlier today after Statoil
ASA, Norway's biggest oil company, agreed to buy North American
Oil Sands Corp., an Alberta-based oil-sands developer, for $2
billion. Higher commodities prices have made Canadian resource-
based companies attractive for buyers. Crude oil prices have
increased more than 30 percent since their recent low of $49.90
per barrel on Jan. 18.

More Mergers

The announcement ``could increase speculation of more M&A
deals involving Canadian oil companies in coming months,''
Matthew Strauss, a currency strategist in Toronto at RBC Capital
Markets, wrote in a report today. He called the acquisition
``bullish'' for the currency.

The Canadian currency has gained more than 3 percent this
month against the U.S. dollar on evidence of economic strength
and on gains in commodities, which account for 54 percent of the
nation's exports.

The yield on Canada's government benchmark 10-year bond
rose nearly 3 basis points, or 0.03 percentage point, to 4.22
percent. The price of the 4 percent security maturing in June
2016 fell 23 cents to $C98.33. Prices move inversely to yields.

To contact the reporter on this story:
Annie Pinkert in New York at