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TORONTO (Reuters) - The Canadian currency closed higher on Monday but retreated from early gains against the U.S. dollar after a report that six euro-zone countries face possible debt downgrades eroded optimism that progress on defusing the debt crisis was being made.
Standard & Poor's has warned Germany, France and four other AAA-rated euro zone countries that their debt might be downgraded in the next 90 days, the Financial Times reported.
"That seemed to knock a little wind out of the sails of the market here," said Matt Perrier, director of foreign exchange sales at BMO Capital Markets.
The report highlighted the uncertainty surrounding the crisis even as French President Nicolas Sarkozy and German Chancellor Angela Merkel agreed on a master plan for imposing budget discipline across the region, saying the European Union treaty must be changed.
"I would say most of the good news has already been priced in, so unless there's some big surprise or some sort of sped-up timeframe in which material changes can be made and felt by the market, then you'll probably see some of this start to unwind next week," Perrier said.
The Canadian dollar ended the North American session at C$1.0168 to the U.S. dollar, or 98.35 U.S. cents, up from Friday's finish of C$1.0183, or 98.20 U.S. cents, but down from session highs. The currency rose as high as C$1.0122 early in the day, but Perrier noted that C$1.0080 was still hanging in as near-term resistance.
On the support side, C$1.0225, followed by C$1.0365 was seen opening the door up to weakness last visited in October around C$1.0550-C$1.06.
As for Tuesday, the market was almost certain that the Bank of Canada will keep its main interest rate at 1 percent at its scheduled policy announcement at 9 a.m. (1400 GMT).
Traders will scrutinize the language of the bank's statement for clues on whether borrowing costs are likely to rise in late 2012, or in early 2013, as well as for hints on how bad the global economy would have to get before the central bank would start easing policy.
Canadian government bond prices edged up across the curve amid the risk-off tone. The two-year bond rose 5 Canadian cents to yield 0.878 percent, while the 10-year bond gained 27 Canadian cents to yield 2.086 percent.
Reporting By Claire Sibonney, Editing by Chizu Nomiyama and Peter Galloway