April 19, 2012 / 4:09 PM / 5 years ago

Canadian dollar slides on soft U.S. data, Europe

TORONTO (Reuters) - The Canadian dollar weakened against its U.S. counterpart on Thursday after soft U.S. economic data suggested a slowdown in the economy of Canada's largest trading partner and ongoing euro zone worries weighed on risk sentiment.

Data from the U.S. on Thursday showed initial claims for state unemployment benefits edged down to a seasonally adjusted 386,000, below the median estimate from a Reuters poll of economists that had forecast claims falling to 370,000.

The four-week moving average for new claims, considered a better measure of labor market trends, rose 5,500 to 374,750.

"The U.S. jobs number definitely provided the market with some impetus to get into a slight risk aversion," said John Curran, senior vice president at CanadianForex.

Housing data on Thursday also raised doubts about the strength of the American recovery, with home resales falling in March. However, the data also revealed the supply of properties on the market tightened and prices inched higher.

At 10:18 a.m. EDT (1418 GMT), the Canadian dollar was at C$0.9945 against the U.S. dollar, or $1.0054, down from Wednesday's finish at C$0.9913 against the U.S. dollar, or $1.0088.

France and Spain sold all the bonds they wanted at auction on Thursday, though for Spain the cost was higher yields, indicating growing concerns the government will not be able to tame its deficit.

Also weighing were rumors that France's sovereign rating may be downgraded further and a survey that showed euro zone consumer confidence fell in April after three months of gains.

European and U.S. economic concerns overshadowed an improving domestic story.

Earlier this week, the Bank of Canada kept interest rates unchanged at 1 percent, as expected, but signaled that it was starting to think more seriously about tightening monetary policy.

"Everyone took that as a feather in Canada's cap," said Curran, adding it boosted the Canadian dollar's appeal. "The problem being that everyone and their brother is long on Canada, so I wouldn't be surprised to see a filtering out of that trade."

Curran saw the currency weakening further against the greenback, but added there should be good demand to buy the Canadian dollar as it gets closer to parity. He said it would likely remain in its range from the last few months, between C$0.9850 to C$1.0050.

The surprisingly hawkish Bank of Canada stance prompted several of the country's primary dealers to pull forward their forecasts for an interest rate hike, according to a Reuters poll, with the central bank now expected to tighten policy early next year. <CA/POLL>

"The domestic story is pretty decent. The Bank of Canada made that clear this week," said Shane Enright, an executive director of foreign exchange sales at CIBC World Markets. "But you still have a lot of issues in Europe."

On Wednesday Bank of Canada Governor Mark Carney said the euro zone debt crisis was "still the biggest downside risk, external downside risk" to the Canadian economy.

Canadian government bond prices were mixed. The two-year bond was unchanged to yield 1.323 percent. The benchmark 10-year bond rose 11 Canadian cents, wotj a yield pf 2.031 percent.

Editing by W Simon

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