By Frank Pingue
TORONTO, April 2 (Reuters) - The Canadian dollar jumped to its highest closing level in two weeks versus the U.S. dollar on Wednesday as prices for key Canadian exports such as oil and gold rebounded.
Canadian bond prices followed U.S. Treasuries lower across the curve as testimony from U.S. Federal Reserve Chairman Ben Bernanke left investors thinking the central bank may soon back away from aggressive interest rate cuts.
The Canadian dollar closed at C$1.0136 to the U.S. dollar, or 98.66 U.S. cents, up from C$1.0217 to the U.S. dollar, or 97.88 U.S. cents, at Tuesday's close.
Getting the credit for the commodity-linked Canadian dollar's rally was a rally in oil prices above $104 a barrel and a rebound in gold prices from the two-month low that was reached on Tuesday.
Also helping the currency's rise was a slide on U.S. stock markets, while the Toronto Stock Exchange's main index stuck higher.
"It's been a day where initially the U.S. dollar tried to go a little bit higher as it was sort of a feel good for North America," said Steve Butler, director of foreign exchange trading at Scotia Capital.
"But after the U.S. stock markets faded, the TSE hung on and we saw the U.S. dollar back off a bit and Canada has managed to hang in very well."
A speech early on Wednesday by Bank of Canada Senior Deputy Governor Paul Jenkins did not affect the Canadian dollar as he repeated comments the bank made last month when it cut interest rates.
Jenkins offered no clue on whether the central bank's thinking on interest rates had changed, and singled out a sluggish U.S. economy as the biggest economic challenge for the rest of the world. He also stressed the need to keep inflation low, stable and predictable.
Key March jobs data due out of the United States and Canada on Friday could open the door to another Canadian dollar rally, especially if the number from the United States, Canada's key trading partner, is solid.
"You know what markets are like and if we do see some more positive news out of the U.S., people will start grasping at straws here hoping that things have turned the corner in the U.S.," Butler said.
"I think it's clearly too soon to say that, but we all live in hope that things aren't maybe as bad in the U.S., or that the worst is behind us now, and we can start to look ahead to brighter times."
BONDS PINNED LOWER
Canadian bond prices were pinned lower as Bernanke said U.S. growth should pick up later this year as interest rate cuts and other emergency steps take root.
Those comments overshadowed Bernanke's comment that the U.S. economy may slip into recession during the first half of 2008.
"Once again it's the notion that the Fed's more than willing to come to rescue in the financial sector and do whatever it takes to ease any systemic risks," said Mark Chandler, fixed income strategist at RBC Capital Markets.
"That overwhelmed the fact that the Fed continues to see a very challenged outlook and possibly recession in the first half of the year."
Also weighing on bond prices was U.S. data released earlier in the session that showed the U.S. private sector unexpectedly added jobs in March.
The data on the private sector followed months of grim economic data out of the United States and offered a touch of optimism about the health of the U.S. economy.
The two-year bond dropped 22 Canadian cents to C$102.15 to yield 2.906 percent. The 10-year bond fell 51 Canadian cents to C$102.86 to yield 3.629 percent.
The yield spread between the two- and 10-year bonds was 72.3 basis points, down from 78.0 points at the previous close.
The 30-year bond fell 48 Canadian cents to C$116.10 to yield 4.053 percent. In the United States, the 30-year Treasury yielded 4.404 percent.
The three-month when-issued T-bill yielded 2.05, up from 2.03 percent at the previous close.