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TORONTO (Reuters) - The Canadian dollar fell versus a stronger U.S. dollar on Thursday as the European Central Bank struck a less aggressive tone than expected on prospects for interest rate hikes this year, which triggered a rally in the greenback.
Canadian bond prices, with no domestic data to influence trade, clawed back from early losses to finish higher across the curve for the second straight session as U.S. jobs data came in below expectations.
The Canadian dollar closed at C$1.0188 to the U.S. dollar, or 98.15 U.S. cents, down from C$1.0134 to the U.S. dollar, or 98.68 U.S. cents, at Wednesday's close.
Comments from ECB Governor Jean-Claude Trichet after the bank's first rate increase in more than a year gave a less hawkish tone to prospects for future rate hikes than the market had expected and gave a boost to the U.S. dollar since the market was long on euros.
Trichet's comments came roughly at the same time as the key piece of U.S. data for the week showed the economy shed 62,000 jobs in June, roughly in line with the 60,000 jobs that the market had forecast.
Together, the two events were enough to force the Canadian currency to relinquish the bulk of the gains it made during the previous session, when it rose more than a cent off its session low of C$1.0222 to the U.S. dollar, or 97.83 U.S. cents.
But some experts considered Wednesday's move overdone as it came amid a sharp slide in equity markets, notably a 432-point drop on the Toronto Stock Exchange's main index.
"It probably wasn't justified being so strong yesterday so it gave back some of the gains overnight and then the momentum continued after the nonfarm data and Trichet's comments," said David Bradley, director of foreign exchange trading at Scotia Capital.
"Plus the market was long euro dollars as well, so when Trichet came out with those comments, we saw it freefall and that's when the U.S. dollar rallied."
Oil prices rose to another record above $145 barrel but did not offer much help to the Canadian dollar as its link with oil prices has diminished this year compared with 2007.
Market conditions are expected to be more illiquid heading into the week's final session as U.S. financial markets will be closed for Independence Day.
"We're really just stuck in this bigger range and I don't see anything that's going to knock it out of that in the near term at all," Bradley said.
Canadian bond prices managed to finish higher since the U.S. jobs data confirmed a grim view of the economy, which forced the market to pare expectations that the U.S. Federal Reserve will raise interest rates any time soon.
Initially, bond prices were lower after the jobs data since the headline number was just a touch below expectations and nowhere near as bad as some had expected.
But they bounced higher as details of the report showed the unemployment rate did not drop, and revisions showed more job losses in April, which brought combined April and May U.S. job losses to 129,000, or 52,000 more than previously thought.
"The ECB helped and the payrolls, which were weaker than expected also helped," said Mark Chandler, fixed income strategist at RBC Capital Markets. "The one thing that sort of tempered some of the gains was equity markets bounced back."
The only piece of data still due out in Canada this week will be Friday's Ivey Purchasing Managers Index for June, which is prone to sharp moves since it is not seasonally adjusted.
Ivey data is expected to show that purchasing activity in the Canadian economy rose in June but at a slightly slower pace than in the previous month.
The two-year bond rose 3 Canadian cents to C$100.99 to yield 3.207 percent. The 10-year bond increased 3 Canadian cents to C$101.93 to yield 3.743 percent.
The yield spread between the two-year and 10-year bond was 53.6 basis points, up from 52.5 at the previous close.
The 30-year bond was unchanged at C$115.70 for a yield of 4.071 percent. In the United States, the 30-year Treasury yielded 4.534 percent.
The three-month when-issued T-bill yielded 2.51 percent, up from 2.52 percent at the previous close.
Editing by Peter Galloway