UPDATE 1-Canadian dollar rallies on BoC rate announcement

Wed Sep 3, 2008 10:28am EDT
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 * Canadian dollar moves off lowest level since August 2007
 * Bank of Canada leaves key interest rate steady at 3 pct
 * Central bank gives no clue where interest rates headed
 (Recasts with Bank of Canada rate announcement)
 By Frank Pingue
 TORONTO, Sept 3 (Reuters) - The Canadian dollar shot higher
versus the U.S. dollar on Wednesday and recouped all its early
losses as the Bank of Canada held its key interest rate steady
and gave no timing for when it might cut rates again.
 The central bank's decision not to offer any signal for
future interest rate cuts also stripped shorter-dated bonds of
gains made earlier in the session.
 At 10:05 a.m. (1405 GMT), the Canadian unit was at C$1.0614
to the U.S. dollar, or 94.22 U.S. cents, up from C$1.0686 to
the U.S. dollar, or 93.58 U.S. cents, at Tuesday's close.
 The surge in the dollar, which at one point hit C$1.0578 to
the U.S. dollar, or 94.54 U.S. cents, came after the central
bank left its key rate steady at 3 percent and delivered a
statement that lessened the odds for a rate cut in October.
 Most Canadian primary securities dealers did not expect the
bank to alter its key overnight rate, but many had thought the
the accompanying statement would signal that rate cuts were on
the horizon.
 Instead, the bank said the current level of the target for
the overnight rate remains appropriately accommodative, which
leaves little chance of a rate cut for the rest of 2008.
 "There was a wide spectrum of views on what the bank would
do and say today and I think this came in near the least dovish
end of the spectrum for the market," said Doug Porter, deputy
chief economist at BMO Capital Markets.
 "That hit the short end of the bond market and put support
into the Canadian dollar."
 The Canadian currency immediately rallied and erased all of
its early losses that had put it as low as C$1.0777 to the U.S.
dollar, or 92.79 U.S. cents. That marked the second straight
day the domestic dollar had fallen to its lowest level since
mid-August 2007.
 The initial slide in the Canadian dollar was pegged to a
drop in oil prices below $109 a barrel, which is a negative for
the domestic currency since Canada is a key oil exporter.
 Shorter-dated bonds were knocked lower as dealers pocketed
earlier gains as the Bank of Canada did little to suggest an
interest rate cut could be coming anytime soon.
 Canadian bond prices had been higher across the curve
earlier given the combination of a lower Canadian dollar,
follow through from the slide in equities on Tuesday and the
slim possibility of a Bank of Canada rate cut.
 The two-year bond was down 20 Canadian cents at C$99.99 to
yield 2.754 percent, while the 10-year fell 15 Canadian cents
to C$106.10 to yield 3.504 percent.
 The yield spread between the two-year and 10-year bond was
71.4 basis points, down from 85.9 basis points at the previous
 The 30-year bond was up 8 Canadian cents at C$117.23 for a
yield of 3.987 percent. In the United States, the 30-year
treasury yielded 4.356 percent.
 The three-month when-issued T-bill yielded 2.48 percent, up
from 2.43 percent at the previous close.