November 24, 2011 / 2:33 PM / 6 years ago

Short-covering lifts Canadian dollar after steep selloff

TORONTO (Reuters) - The Canadian dollar recovered slightly against its U.S. counterpart on Thursday as investors took profits on the sharp U.S. dollar rally in the previous session on fears the euro zone crisis was spreading to Germany.

The Canadian dollar also skidded to a seven-week low against the U.S. currency on Wednesday after a weak German bond auction rang alarm bells about Europe’s biggest economy.

“(Short covering) was the core story across a lot of currency pairs through Asia and through the London session this morning that we saw profit taking generally on the big (U.S.) dollar rally that came through pretty much in parallel against all the majors yesterday and took dollar/Canada with it,” said Adam Cole, global head of FX strategy at RBC Capital Markets in London.

“We’ve seen a partial reversal of that today. Again that’s carried dollar/Canada with it rather than anything Canadian-dollar specific.”

Still, more weakness was expected for riskier assets after German government bond yields hit their highest in nearly a month on Thursday.

At 8:46 a.m., the Canadian currency stood at C$1.0462 to the U.S. dollar, or 95.58 U.S. cents, up from Wednesday’s North American session close at C$1.0485 against the greenback, or 95.37 U.S. cents.

The Canadian dollar came within striking distance to C$1.05 on Wednesday, a level still seen as support, but remained vulnerable amid thin liquidity due to the Thanksgiving holiday in the United States.

“It would be too soon to say the worst is over today particularly as markets are very thin with the U.S. closed and likely to stay that way for the rest of the week,” added Cole.

Canadian government bond prices eased across the curve, underperforming rising U.S. Treasuries, pushing benchmark yields to the lowest in seven weeks.

Canada’s two-year bond fell 2 Canadian cents to yield 0.904 percent and the 10-year bond dropped 18 Canadian cents to yield 2.060 percent. On Wednesday, the 10-year bond hit a low not reached in Bank of Canada records going back to 1951.

Reporting by Claire Sibonney, Editing by W Simon

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