Oct. 23 (Bloomberg) -- Canada’s dollar weakened for a second day after central bank Governor Mark Carney warned that the currency is too strong, spurring investors to look elsewhere for higher yield. The Canadian dollar posted for its first weekly drop in a month as crude oil, the nation’s biggest export, and stocks fell. Carney said yesterday investors lost their “focus” on the central bank’s commitment to meet a 2 percent inflation target, and that action to weaken the currency is “an option.” “The markets take Governor Carney very seriously,” said Jack Spitz, managing director of foreign exchange at National Bank of Canada in Toronto. “For the Canadian dollar there’s likely to be some lag as a result of Carney’s comments.” The currency, nicknamed the loonie for the aquatic bird on the C$1 coin, depreciated 0.5 percent to C$1.0522 per U.S. dollar at 4:29 p.m. in Toronto, from C$1.0475 yesterday. It dropped 1.5 percent for the week, the first five-day decline since Sept. 25. One Canadian dollar purchases 95.04 U.S. cents. The loonie climbed 19 percent this year through Oct. 19, the day before the Bank of Canada left interest rates at a record low and stepped up warnings about the risk posed to the nation’s recovery by a stronger currency. A more valuable Canadian dollar makes shipments of automobiles, lumber and metals to the U.S. less competitive and restrains inflation by making imports cheaper. U.S. Dollar Weakness The central bank said strength in the loonie appears “to have been increasingly driven” by U.S. dollar weakness. It also raised to 96 U.S. cents its assumption for where the Canadian dollar will trade through 2011, from the 87 U.S. cents it forecast in July. Policy makers reiterated the bank’s conditional commitment to keep interest rates on hold through June 2010. The greenback fell this year against all of its 16 most- traded counterparts tracked by Bloomberg except the yen. “The first response would most likely not be physical intervention, but would be a signal that interest rates would be on hold longer than the current second-quarter 2010 timeframe,” Camilla Sutton, director of currency strategy at Scotia Capital Inc. in Toronto, wrote in a note to clients today. “We think the Bank of Canada still has some tolerance for a stronger Canadian dollar.” Central banks intervene to influence exchange rates by buying or selling currencies. Carney is scheduled to speak on financial regulation on Oct. 26 in Montreal. Oil, Stocks Crude oil for December delivery tumbled 1.9 percent to $79.69 a barrel on the New York Mercantile Exchange after rising earlier as much as 0.7 percent to $81.78. Crude traded at a one- year high of $82 a barrel on Oct. 21. The Standard & Poor’s 500 Index slid 1.2 percent as the biggest U.S. railroad, Burlington Northern Santa Fe Corp., lost 6.6 percent for the third quarter and forecast lower fourth- period profit than analysts estimated and the drop in oil weighed on energy producers. Canadian government bonds fell, pushing up the 10-year note’s yield four basis points, or 0.04 percentage point, to 3.49 percent. The price of the 3.75 percent security maturing in June 2019 decreased 29 cents to C$102.07. The yield on the 1.25 percent bond maturing in December 2011 rose two basis points to 1.51 percent. The nation’s government bonds lost investors 1.5 percent this year, according to a Merrill Lynch index. Canada’s gross domestic product increased 0.1 percent in August, the government is likely to report next week, according to the median forecast of 21 economists surveyed by Bloomberg News. The economy stalled in July. Statistics Canada is scheduled to issue the report on Oct. 30. To contact the reporter on this story: Chris Fournier in Montreal at cfournier3@bloomberg.net

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