TORONTO - The Canadian dollar backed off Wednesday and the U.S. currency strengthened ahead of an afternoon announcement by the Federal Reserve that could shed light on when the central bank plans to wind up its bond purchases program.

The loonie fell 0.23 of a cent to 94.02 cents US.

Speculation has grown that the Fed would use this scheduled interest rate meeting to announce it will start cutting back on its monthly US$85 billion of bond purchases. Those purchases have kept long term rates low and encouraged investors to put their money into the stock market, which has in turn supported a strong rally on markets this year.

However, opinion on what the Fed will do if far from unanimous.

"We expect the Fed to lay the foundation for tapering to begin in January," said Scotia Capital chief currency strategist Camilla Sutton.

"But (we) recognize that with developments on the U.S. budget deal, 10-year yields relatively stable at 2.85 per cent, an improvement in the labour market and economic indicators, there is a small risk that tapering occurs today."

Sutton said that with inflation trending lower, "we suspect the Fed will be hesitant to begin tapering before these metrics have stabilized."

Data out Tuesday showed that U.S. consumer prices stayed flat in November, with the consumer price index unchanged last month, after dropping 0.1 per cent in October. Over the past 12 months, consumer prices have risen just 1.2 per cent. That is significantly below the Fed’s inflation target of two per cent.

The Fed makes its announcement at 2 p.m. EST, followed by a news conference by Bernanke at 2:30 p.m.

Commodity prices were mixed with the January crude contract on the New York Mercantile Exchange 17 cents higher to US$97.39 a barrel.

March copper declined a penny to US$3.31 a pound while February gold gained $2.10 to US$1,232.20 an ounce.

Elsewhere on the economic front, U.S. housing starts came in better than expected for November, rising to an annual rate of 1.09 million, much higher than the 952,000 that economists had expected. It was also the fastest pace since February 2008, just a few months after the recession began.

German business confidence has edged higher amid hopes of faster economic growth in the new year. The Ifo institute’s closely watched confidence index climbed to 109.5 points this month from 109.3 in November.

The German economy, Europe’s biggest, is expected to see growth accelerate next year after only a modest increase in output in 2013.

News from © The Canadian Press, 2013