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TORONTO (Reuters) - Canada's currency turned positive against the U.S. dollar on Tuesday morning after the Bank of Canada kept its key interest rate at 1 percent and gave no suggestion of an impending rate cut.
The central bank predicted that Europe's recession would be "more pronounced" than previously thought, but it also said growth in the United States had been slightly more robust than it had forecast.
"In a sense you see that there's a somewhat better tone and what's important is that this better economic tone is also coming from our most important trading partner," said Stefane Marion, chief economist at National Bank Financial in Montreal.
Following the bank's statement, the Canadian dollar turned positive, rising as high as C$1.0122 against the U.S. dollar, or 98.79 U.S. cents, from about C$1.0200, or 98.04 U.S. cents immediately before the announcement.
Higher interest rates tend to strengthen currencies by attracting international capital flows.
"We've seen the Canadian dollar strengthen ... generally, I think it's because this is perhaps a touch less dovish than had been expected," said Doug Porter, deputy chief economist at BMO Capital Markets. "Perhaps there was a slight chance the Bank of Canada was even pondering a rate cut, but there was no indication whatsoever of that here."
After the central bank's announcement, traders pared back bets for a rate cut next year.
At 9:48 a.m., the Canadian dollar was at C$1.0135 against the U.S. dollar, or 98.67 U.S. cents, up from Monday's North American session finish of C$1.0168 to the U.S. dollar, or 98.35 U.S. cents.
Earlier, the currency had been dragged down as risk sentiment eroded after rating agency Standard & Poor's threatened to downgrade the debt of 15 euro nations.
The unprecedented warning by S&P was being seen as a wake-up call that could help Germany and France force through treaty changes at a summit this week.
Canadian government bond prices slipped alongside U.S. Treasuries. The two-year bond fell 9 Canadian cents to yield 0.925 percent, while the 10-year bond was down 16 Canadian cents to yield 2.109 percent.
Reporting By Claire Sibonney; Editing by Peter Galloway