TORONTO (Reuters) - The Canadian dollar finished a touch higher against the U.S. dollar on Thursday after rallying sharply from a 1-month low as a weaker greenback sent the price of oil higher and gave a lift to the commodity-linked currency.
Domestic bond prices were knocked lower across the curve as investors unloaded the secure assets in favor of equities after some upbeat economic data.
The Canadian dollar closed at C$1.0178 to the U.S. dollar, or 98.25 U.S. cents, up from C$1.0183 to the U.S. dollar, or 98.20 U.S. cents, at Wednesday's close.
Comments from European Central Bank President Jean-Claude Trichet that suggested euro-zone interest rates could rise as early as next month rattled the U.S. dollar and sent oil prices higher, which ultimately supported the domestic currency since Canada is a major oil exporter.
"What's holding the currency in at the moment is the rise in the price of crude oil coming on the back of U.S. dollar weakness," said Jack Spitz, managing director of foreign exchange at National Bank of Canada.
"So that cause and effect of a high price in energy is giving the Canadian dollar a slight boost today and reversing the trend to buy (U.S.) dollar Canada for the moment."
The rally in the Canadian dollar came after it had dropped to C$1.0221 to the U.S. dollar, or 97.84 U.S. cents, earlier in the session, which marked its lowest level since May 2 and put an end to a four-day losing streak.
That losing skid was triggered last week when domestic data showed the economy unexpectedly shrank in the first quarter. It picked up steam this week as oil prices eased and comments from Federal Reserve Chairman Ben Bernanke supported the greenback.
Now there is talk that the Fed could raise its key lending rate by the end of the year while the Bank of Canada is widely expected to cut its overnight rate next week and lessen the interest-rate gap that currently favors the Canadian dollar.
"Bids in dollar Canada, the inference that interest rates in the States are going higher, soft data in Canada, and once again the inference that interest rates are going to be lowered in Canada, all contributed to Canadian dollar weakness," said Spitz.
But despite the sudden turnaround by the Canadian dollar, it remained well inside its recent range, given the uncertainty ahead of Friday's key domestic jobs report and the Bank of Canada's scheduled interest rate announcement on June 10.
Canadian bond prices all ended lower as investors rushed into North American stock markets as oil prices jumped more than $5 to nearly $128 a barrel.
The Toronto Stock Exchange's main index rose 2 percent and the Dow Jones industrial average finished 1.7 percent higher.
Another weight on bond prices was data that offered hope that the U.S. economy is improving, while other reports offered more signs of a solid Canadian economy.
The U.S. data showed a surprise drop in weekly claims for unemployment benefits while Canadian numbers showed April building permits shattered expectations.
"Bonds were whacked by the strong rally in equities ... and some of the firmer data that continues to drip out of the U.S. and Canada," said Sal Guatieri, senior economist at BMO Capital Markets. "And there's just a general sense that the U.S. economy is bottoming out and is on the road to recovery."
Markets will now await the key Canadian jobs data that is due on Friday, the last key data for the Bank of Canada to consider ahead of its rate announcement next week.
The Canadian economy is expected to have added 10,000 jobs in May while the unemployment rate remained steady 6.1 percent, according to Reuters Estimates.
The two-year bond fell 8 Canadian cents to C$101.65 to yield 2.885 percent. The 10-year bond dropped 48 Canadian cents to C$102.25 to yield 3.703 percent.
The yield spread between the two-year and 10-year bond was 81.8 basis points, up from 78.3 at the previous close.
The 30-year bond fell 90 Canadian cents to C$114.10 for a yield of 4.158 percent. In the United States, the 30-year Treasury yielded 4.739 percent.
The three-month when-issued T-bill yielded 2.54 percent, unchanged from the previous close.
Editing by Rob Wilson