Loonie's rise has been higher than expected, Dodge says

The Canadian dollar has risen higher than economic factors alone can explain, Bank of Canada governor David Dodge said Wednesday in a rare foray into currency commentary.

In a speech to a St. John's business audience, Dodge said there are some good explanations for much of the dollar's recent climb to 94 cents US —strong commodity prices, a positive outlook for the Canadian economy, and strong demand for Canadian goods and services.

But he said those factors can't account for all of the loonie's recent rise — five cents inthe last two months and nine cents in the last three months.

"The overall response of the Canadian dollar to these factors appears to have been stronger than historical experience would have suggested," Dodge said.

The distinctions over what's behind the loonie's rise are important because currency moves caused solely by economic factors are considered "Type 1" movesthat don't typically get the Bank of Canada to adjust rates.

A "Type 2" move, on the other hand,is unrelated to economic fundamentals. Speculation or a general depreciation of the U.S. dollar would be examples of Type 2 movements. That could lead the central bank to cut rates to rein in the dollar.

Dodge's comments may have been aimed at trying to cool the international interest in the dollar.

ButDodgehinted Wednesday that he's stillclearly leaning towards raising rates, ashe repeated comments he used last month that were widely interpreted as hawkish.

"Some increase in the target for the overnight rate may be required in the near term to bring inflation back to the target," he said.

InWednesday afternoon trading, the loonie was little changed —up 0.02 cents to close at 93.76 cents US.

Some analysts have predicted the loonie could eventually reach parity with the U.S. dollar. Dodge suggested those forecasts aren't worth much.

"Some of those same economists were the ones that predicted the Canadian dollar would go to 50 cents, so I think you take those predictions for what they're worth," he told a news conference.