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TORONTO (Reuters) - The Canadian dollar slumped to its lowest level in more than two weeks against the U.S. dollar on Friday after soft domestic employment data and anxiety over Europe's debt crisis outweighed the positive implications of an impressive U.S. jobs report.
Most of the details in the Canadian employment survey disappointed. The economy added 17,500 jobs in December, but the jobless rate rose and the new positions were all part-time, further evidence the post-recession hiring surge has ended even as U.S. jobs growth finally picks up the pace.
Canada outperformed the United States both during and after the global financial crisis, recovering all of the jobs it lost in the recession. But the reports on Friday suggest that relative strength could be waning.
"Canada is somewhat out of step with the rest of the world and that still seems to be the case after today's report ... maybe we're a victim of our own success," said Sheryl King, head of Canadian economics at Bank of America-Merrill Lynch.
The Canadian dollar ended the North American session at C$1.0270 to the U.S. dollar, or 97.37 U.S. cents, down from Thursday's North American finish at C$1.0191 against the U.S. dollar, or 98.13 U.S. cents. The currency ended the first week of 2012 down 1 percent.
Weak U.S. and Canadian equity markets and a plunging euro didn't help sentiment for Canada's cyclical currency, as investors continued to worry about funding for European governments and banks. .N .TO
"It's just more generally risk-off sentiment. I think the Canadian jobs data on the margin had a role to play because the Canadian dollar is the worst performer on the day relative to the U.S.," said David Tulk, chief Canada macro strategist at TD Securities.
"It's added a little sense of unease into the market."
In a wobbly session, the currency briefly turned positive after the U.S. data, which showed employment growth accelerated last month and the jobless rate dropped to a near three-year low of 8.5 percent, the strongest evidence yet the economic recovery is picking up.
Investors said however that the "whisper number" for the jobs data on Friday was probably higher than official forecasts after a standout private sector ADP report on Thursday.
"Maybe that had created some expectation for something stronger so there was the sense that it was it going to disappoint given the mixed evidence of the ADP," added Tulk.
Spoiling broader risk appetite, the euro fell to 16-month lows against a robust greenback as investors compared sovereign funding concerns and the outlook for the euro zone to an improving U.S. economic recovery.
The market is seen staying on edge ahead of Italian and Spanish bond sales next week, viewed as the year's first big fundraising tests for struggling euro zone countries.
As well, eyes will be on a meeting between French President Nicolas Sarkozy and German Chancellor Angela Merkel on Monday for fresh hints on steps they may take to try to resolve the currency bloc's financial crisis.
With the United States Canada's biggest trading partner by far, analysts say the improving outlook for the U.S. economy is going to play well for Canada economy and the Canadian dollar in the next year.
"Specifically on the crosses I like very much euro/Canada, Aussie/Canada, selling the currencies and buying Canada against both," said Firas Askari, head of foreign exchange trading at BMO Capital Markets.
In coming weeks, Askari said he sees the Canadian dollar trading in a range of between C$1.0050 and C$1.04 against the greenback.
Overnight index swaps, which trade based on expectations for the Bank of Canada's key policy rate, suggest that traders see a higher probability of an interest rate cut in the second half of 2012, which would be negative for the currency.
Canadian bond prices rose, tracking U.S. Treasuries higher as a modest stock market retreat and remarks from top U.S. Federal Reserve officials calling for more monetary stimulus overshadowed more evidence of a revival in the U.S. labor market.
However, the two-year government bond, which is especially sensitive to Bank of Canada interest rate moves, outperformed its U.S. counterpart at the short end of the curve, rising 7 Canadian cents to yield 0.929 percent.
"We also have further to fall ... two years at 25 basis points in the U.S. are affectively as low as they can go, whereas Canada is still at 1 percent. There's a little bit more opportunity for investors to express a view," added TD's Tulk.
The 10-year bond underperformed slightly in the flight to safety, climbing 27 Canadian cents to yield 1.942 percent.
Additional reporting by Jennifer Kwan; editing by Rob Wilson