Loonie falls back on tough central bank talk

The Canadian dollar sagged heavily Tuesday, dragged down nearly two cents US as the Bank of Canada talked tough about the perils of the soaring currency.

The loonie endedtrading at 95.17 cents US, down1.98 cents from Monday.

On Tuesday, Canada's central bank opted to hold its overnight lending rate steady at 0.25 per cent. Therehad beensome talk that the bank might hike its key policy rateto slow inflation and begin to turn off the stimulus taps.

But the central bank did no such thing,instead cautioning that the sharp rise in the Canadian dollar is"working to slow growth."

"To those expecting an early rate hike in Canada, the banks message was 'not so fast,'" CIBC chief economist Avery Shenfeld said. "The bank takes currency impacts on growth and inflation very seriously."

The central bank added in itsstatement accompanying the rate decision that the country's gross domestic product is still expected to grow by three per cent next year, but only 3.3 per cent in 2011, two-10ths of a point less than the Bank of Canada had forecast in July.

"We expected the Bank of Canada to make some comment about the Canadian dollar,"David Watt, senior currency strategist at RBC Capital Markets, said after the decision, which came a week after the dollar had closed within about 2.5 cents of parity with the U.S. dollar.

"But the comments that have been made are very stark and very clear. There's no misunderstanding what the bank sees in regard to the Canadian dollar as it approached parity it's a significant risk to the outlook for the Canadian economy."

The Canadian dollar has seen particularly sharp run-ups of late because of a weakening U.S. dollar and higherprices for commodities, particularly oil.