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TORONTO (Reuters) - The Canadian dollar rallied against the U.S. dollar on Tuesday and outperformed other major currencies after the Bank of Canada sounded less dovish than expected in its policy announcement and as other riskier assets cut losses.
Breaking a near-term resistance level though C$1.01, Canada's currency strengthened to C$1.0085 against its U.S. counterpart, or 99.16 U.S. cents, in tandem with a session high in the euro.
Global risk appetite improved modestly heading into the North American session close on hopes that European leaders would take strong steps this week to end the euro zone's debt crisis, including bolstering a financial rescue fund.
Earlier, the Bank of Canada kept its overnight interest rate at 1 percent on Tuesday, as expected, and gave no suggestion of an impending rate cut even though bank's view of the European debt crisis has clearly darkened.
Immediately following the central bank's morning statement, the Canadian dollar turned positive as traders pared back bets for a rate cut next year.
"There might have been expectations of an ease but certainly for the bank to be a little bit more dovish in its comments, but that was not the case," said Shaun Osborne, chief currency strategist at TD Securities, pointing out that the Reserve Bank of Australia cut its key rate by 25 basis points early in the day.
Higher interest rates tend to strengthen currencies by attracting international capital flows, while the prospect of lower official interest rates dampens investor interest in a currency as higher returns are sought elsewhere.
"(The Bank of Canada) maintained a fairly steady line in terms of indicating where policy may go moving forward, and that is essentially nowhere," Osborne said. "The bank's message was that there is already considerable stimulus in the economy at the moment, it gave very little hope in terms of the forward-looking sentiment about rate cuts moving forward."
The Canadian dollar finished at C$1.0096 against the U.S. dollar, or 99.05 U.S. cents, up from Monday's North American session close of C$1.0168 to the U.S. dollar, or 98.35 U.S. cents.
On the Canadian dollar's stronger performance than the Aussie dollar, euro and sterling, Osborne noted that those currencies are all facing lower interest rates at home. Against the U.S. dollar, he put the Canadian dollar's broad short-term range at par to C$1.03.
Canadian government bond prices slipped alongside U.S. Treasuries in what could be the calm before the storm as investors wait on key events in the euro zone planned for later this week.
The European Central Bank is expected to cut interest rates and offer ultra-long liquidity operations to support banks when it meets on Thursday.
Canada's two-year bond fell 5 Canadian cents to yield 0.920 percent, while the 10-year bond dropped 30 Canadian cents to yield 2.124 percent.
Editing by Jeffrey Hodgson and Peter Galloway