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* C$ weakens to C$0.9530 to the U.S. dollar, or $1.0493
* Conservative majority win supportive of CAD
* Bonds mostly higher, outperform Treasuries
By Solarina Ho
TORONTO, May 3 (Reuters) - Canada's dollar weakened on Tuesday as broad strength in the U.S. currency ended an overnight rally triggered by the ruling Conservatives' crushing victory in Monday's federal election.
The Canadian dollar rose to near three-and-half-year highs overnight after the Conservatives's finally secured the majority government it has sought since coming to power in 2006.
But the rally was short-lived after the U.S. dollar came off three-year lows as a build-up of bets to sell the greenback based on loose U.S. monetary policy ran out of steam and as global economic data dampened market sentiment.
"It's being caught up once again in general U.S. dollar strength. There's a definite risk-off tone to the market this morning, so the best thing the Canadian dollar can do is be a relatively small underperformer," said David Tulk, chief Canada macro strategist at TD Securities.
"We're a little bit less comfortable with some of the outlook for the global economy. We're still thinking about the Chinese PMI that came out earlier this week ... just generally, there's a sense that there's enough apprehension out there that markets are still struggling for a reason to be optimistic."
Also weighing on the commodity-linked currency, was a slump in crude prices, which slid on the U.S. dollar strength. [O/R]
At 8:52 a.m. (1252 GMT), the currency CAD=D4 stood at C$0.9530 to the U.S. dollar, or $1.0493, off Monday's North American finish of C$0.9508 to the U.S. dollar, or $1.0517.
It had hit an earlier high of C$0.9460, or $1.0571 as the market sighed in relief over the Conservative's win after weeks of uncertainty over the outcome. Analysts agree the longer term implications should be positive for the currency.
"It's positive that Canada now has an outright majority government," said Adam Cole, global head of FX strategy at RBC in London.
"The general trend during the campaign was of CAD underperformance ... which was driven by the uncertainty surrounding the surging support for the New Democrat Party. What we should see now is that trade unwinding."
TD's Tulk expects the currency to trade between C$0.9460 and above the session open of C$0.9510.
Some analysts noted that the Conservatives victory is not entirely bullish for the Canadian dollar.
The party's focus on fiscal restraint through contained spending growth in the next few years will be a partial substitute for more aggressive Bank of Canada interest rate hikes, Avery Shenfeld, an economist with CIBC World Markets, said in a note to clients.
Higher interest rates tend to help currencies strengthen by attracting international capital flows.
With election uncertainty out of the way, employment data this coming Friday, which is expected to show a gain of 22,500 jobs, will be the next key driver for the Canadian dollar. ECONCA
Canadian bond prices were mostly higher across the curve, shadowing movements in the U.S. Treasury market. [US/]
The two-year bond CA2YT=RR was up 4 Canadian cents to yield 1.681 percent, while the 10-year bond CA10YT=RR added 35 Canadian cents to yield 3.162 percent.
Canadian bonds outperformed with the yield on the 10-year bond widening to 10 basis points below its U.S. counterpart, compared with 7.5 basis points on Monday. (Editing by Jeffrey Hodgson)