Loonie lower as U.S. economy contracts, traders look to Fed stimulus intentions

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TORONTO - The Canadian dollar was lower against the American currency Wednesday morning as traders took in data showing the U.S. economy unexpectedly shrank in the fourth quarter and looked to the end of the Federal Reserve's two-day meeting on interest rates.

The currency declined 0.1 of a cent to 99.66 cents US.

The U.S. Commerce Department reported that the economy shrank by 0.1 per cent, hurt by the biggest cut in defence spending in 40 years, fewer exports and sluggish growth in company stockpiles. Economists had expected growth of 1.1 per cent in the October-December period.

No movement on interest rates is expected from the Fed. But traders will be looking for any hints as to when the Fed might start to wind up its current round of economic stimulus, which has involved buying bonds by increasing the money supply.

There has been a growing expectation that it may be tempted to reverse its position after minutes from the last meeting in December showed a split among members over how long to continue the stimulus. Some thought the program should be slowed or stopped before the end of 2013 amid concerns that the bond purchases would destabilize the economy.

Traders also looked to the release of employment data two days before the U.S. government comes out with its non-farm payrolls report for January.

Payroll firm ADP reported that the private sector created 192,000 jobs during January. Economists expect the government report to show that the economy created a total of 153,000 jobs, about the same amount as December.

Traders also looked ahead to the latest reading on Canadian economic growth later in the week. On Thursday, Statistics Canada is expected to report that gross domestic product grew by 0.2 per cent during November, up from 0.1 per cent in October.

Commodity prices lost some early momentum after the economic data was released as the March crude contract on the New York Mercantile Exchange edged up 15 cents to US$97.72 a barrel.

March copper on the Nymex gained four cents to US$3.73 a pound while February bullion advanced $13.90 to US$1,674.70 an ounce.

Organizations: Federal Reserve, U.S. Commerce Department, Statistics Canada New York Mercantile Exchange Nymex

Geographic location: U.S., TORONTO

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