TORONTO (Reuters) - The Canadian dollar ended slightly lower against the U.S. currency on Tuesday, pulled down by investor concern that policymakers will have troubles containing the euro zone's debt troubles.
But the Canadian dollar's drop was cushioned by strong domestic data that showed manufacturing sales rose twice as fast as expected in September to the highest level since October 2008, sealing expectations for robust third-quarter economic growth.
Data that offered hope that the U.S. economy would avoid another recession also lifted sentiment. Retail sales were stronger-than-expected in October while activity in the New York manufacturing sector rose in November, ending five straight months of contraction.
"We've seen a pretty decent retracement in terms of our profile coming out of the European session. It was one dominated by continued and persistent concerns on the EU periphery," said Stewart Hall, senior currency strategist at RBC Capital Markets.
"But certainly as we moved into North America we got that good punch of positive data out of both the U.S. and Canada."
The Canadian dollar briefly strengthened against the U.S. currency after the data, hitting C$1.0204 to the greenback, or 98.00 U.S. cents. This was up from about C$1.0236 before the report.
The currency ended at C$1.0208 against the greenback, or 97.96 U.S. cents, down from C$1.0169 versus the U.S. dollar, or 98.34 U.S. cents on Monday.
Market watchers said there is a fair amount of pessimism in the global markets that could hit the Canadian dollar and its commodity-linked peers given the uncertainty in Europe.
"The expectations are that these countries are in dire straits and a change in leadership doesn't necessarily change the facts on the ground," said Firas Askari, head of foreign exchange trading at BMO Capital Markets.
RBC's Hall added: "Decoupling from that European story would require a persistent reinforcement out of the U.S. that things are getting better."
Canadian government bond prices were flat to lower across the curve. The move mimicked the broader market trend that saw U.S. Treasuries slip as stock markets steadied, dampening the bid for safe-haven U.S. government debt. <US/>
"You've still got that risk-on, risk-off dynamic. You've got a more positive economic story beginning to manifest itself and that would be part of it," said Hall.
The two-year bond ticked 1 Canadian cent higher to yield 0.906 percent, while the 10-year bond dropped 8 Canadian cents to yield 2.129 percent.
Editing by Jeffrey Hodgson