Investing.com - The Canadian dollar jumped to one-year highs against its U.S. counterpart on Wednesday after the Bank of Canada raised interest rates, making it the first major central bank to follow the Federal Reserve in tightening monetary policy.
USD/CAD was down 0.73% to 1.2822 by 10.20 AM ET, the lowest level since August 2016 from around 1.2910 earlier.
The BoC raised the cash rate to 0.75% in a widely anticipated decision. It also raised the bank rate to 1% and the deposit rate to 0.5%.
The rate increase was the first under Governor Stephen Poloz, who took over at the helm of the bank in 2013 after his predecessor Mark Carney went to the Bank of England.
In a statement, the bank said growth is strengthening across the economy and becoming more sustainable.
"Recent data have bolstered the bank’s confidence in its outlook for above-potential growth and the absorption of excess capacity in the economy."
The bank acknowledged recent softness in inflation, but said the factors behind it appear to be mostly temporary and noted that the adjustment to lower oil prices is largely complete.
Expectations for a rate hike had been rising since senior BoC officials said last month that a pair of rate cuts in 2015 had done their job in cushioning the economy from the steep fall in oil prices.
In the U.S., Federal Reserve Chair Janet Yellen reiterated Wednesday that the Fed will stick to a gradual approach when raising interest rates.
In prepared testimony to the House Financial Services committee, Yellen said the Fed is likely to unwind its stimulus despite low inflation.
Yellen gave no clear indication of whether the Fed would raise interest rates a third time this year.
The Fed chair also emphasized that inflation is below target and noted that it is a particular ‘uncertainty’ that could affect monetary policy.
The dollar was higher following the remarks, with the U.S. dollar index, which measures the greenback’s strength against a trade-weighted basket of six major currencies, up 0.18% to 95.66.