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TORONTO (Reuters) - The Canadian dollar hit its weakest level in nearly two weeks against its U.S. counterpart on Tuesday after a Bank of Canada speech omitted mention of its long-stated intention to raise interest rates once conditions permit.
Governor Mark Carney said on Monday that the central bank would take whatever action is necessary to keep inflation on target and acknowledged the effect global uncertainty was having on Canada's resource-linked economy.
But the speech omitted key hawkish language about withdrawal of "considerable monetary policy stimulus".
The Canadian dollar was initially little changed as analysts tried to gauge whether Carney was simply refraining from including forward-looking language ahead of the bank's October 23 interest rate decision, or abandoning the monetary tightening bias altogether.
But the currency slid overnight as traders decided the omission was a dovish signal.
"It pretty much wrung out any rate expectations that were in place for next year," said Mark Chandler, head of Canadian fixed income and currency strategy at Royal Bank of Canada. "There was a bit of a delayed reaction in currency markets."
Overnight index swaps, which trade based on expectations for the central bank's key policy rate, showed that traders have eliminated their bets on a rate hike in 2013.
"Clearly the market is still reacting to the comments from Carney yesterday. That's continuing to weigh on the Canadian dollar," said Jeremy Stretch, head of foreign exchange strategy at CIBC World Markets in London.
By 12:45 p.m. EDT (1645 GMT) the Canadian dollar was at C$0.9858 to the U.S. dollar, or $1.0144, compared with C$0.9800, or $1.0204, at Monday's North American close. It hit C$0.9880 in early trade, its weakest level since October 3.
The currency won back some value after the release of strong Canadian factory and investment data on Tuesday.
Canadian manufacturing sales rebounded much more sharply than expected in August after a two-month slump, on the back of a resurgent energy sector.
Foreigners upped their interest in Canadian securities in the same month, investing almost C$7 billion with a focus on corporate bonds and money market instruments.
A trend toward investment in Canada supports the Canadian dollar.
Canadian government bond prices were broadly lower, hurt by a rebound in appetite for riskier assets that drove North American equities higher. .N .TO
But Carney's speech helped boost the prices of shorter-term T-bills, and Canadian government bonds outperformed U.S. Treasuries.
The two-year bond lost half a Canadian cent to yield 1.082 percent, while the benchmark 10-year bond fell 11 Canadian cents to yield 1.809 percent.
The sudden announcement by Ontario Liberal Premier Dalton McGuinty on Monday that he would resign had only a muted impact on the price of the province's debt.
The yield on Ontario's 10-year bond traded 94 basis points above its Canadian government counterpart, little changed from Monday.
RBC's Chandler ascribed the lack of reaction in Ontario bond spreads to the government's fiscal update on Monday, which showed Canada's most populous province is reducing its budget deficit faster than projected.
Hosen Marjaee, a bond fund manager at Manulife Asset Management, said he was slightly surprised that Ontario bond spreads held steady following McGuinty's resignation announcement.
"There are risks involved in terms of who's going to be the new leader of the (Liberal) party, (whether) there's going to be an election, who's going to win that election and whether they're going to have more expansionary policies," he said.
The news will only add to the scrutiny by investors and ratings agencies of the province's efforts to curb its budget deficit. Those efforts have included tough negotiations with teachers and health care workers over their pay.
"This is an usually volatile period in time and certainly having a premier step down in the middle of this doesn't really help, it adds to the uncertainty," said Mario Angastiniotis, Standard & Poor's lead Ontario analyst, who spoke to provincial finance officials on Tuesday.
"The status quo remains ... If we see changes in the numbers, that's when we start reacting. So far the numbers are ahead of budget," he added.
The rating agency in April lowered its outlook on Ontario's debt to "negative," while Moody's downgraded its rating.
Editing by Jeffrey Hodgson; and Peter Galloway