TORONTO (Reuters) - The Canadian dollar rose against the U.S. dollar on Tuesday, moving off a 2-1/2 week low, as a rebound in oil and gold prices supported the commodity-linked currency.
Domestic bond prices were down ahead of a speech by a Bank of Canada official which may offer clarity on the central bank's impending monetary policy decision on January 22.
At 9:20 a.m. the Canadian unit was at 99.87 U.S. cents, valuing a U.S. dollar at C$1.0013, up from 99.44 U.S. cents, or C$1.0056, at Monday's close.
The Canadian dollar fell to 99.21 U.S. cents, or C$1.0080, on Monday, which marked its lowest level since December 19. But it managed to bounce back during the overnight session along with a rise in oil and gold prices.
"Oil has recovered about half its losses from yesterday and gold is at a new record high so that's generally giving the Canadian dollar a bit of independent support," said Adam Cole, currency strategist at RBC Capital Markets in London.
The rise in the Canadian dollar brought it closer to parity with its U.S. counterpart, and many market experts expect it to stay there through the first quarter of the year.
Bank of Canada Deputy Governor Sheryl Kennedy will give a speech in Montreal shortly after midday, but the market does not expect her to stray from recent Bank of Canada comments.
Earlier this week, Bank of Canada Governor David Dodge said in Switzerland that a slowdown in the U.S. economy in the first half of 2008 could have a worse impact on Canada's performance than was expected a few months ago.
"Bear in mind that Dodge has already hinted in the last couple of days that the general growth background and risks for Canada have deteriorated since late last year," said Cole. "So we've kind of been creeping in that direction already and also the market is, I would guess, priced for a January rate cut."
Canadian bond prices fell, reversing the sharp gains made during Monday's session when a retreat on the Toronto Stock Exchange prompted a parade into more secure assets like government debt.
And with no domestic data to consider, Canadian bond prices took their cue from the bigger U.S. treasury market, which was lower after a speech by U.S. Federal Reserve Bank of Philadelphia President Charles Plosser.
"Plosser's probably the most hawkish member of the voting committee and I think the market is starting to realize that the new voting committee for the Fed is more hawkish than the old one.," said Eric Lascelles, chief economics and rate strategist at TD Securities.
"So you have a slightly more hawkish bias and it might limit the extent to which the Fed can cut (rates) and I think that may be prompting the bond market to sell off a bit."
Recent data suggests the U.S. Federal Reserve could cut interest rates by as much as half a percentage point at its January 29-30 meeting, while the Bank of Canada is expected to cut rates by 25 basis points later this month.
The overnight Canadian Libor rate was at 4.3033 percent, up from 4.2033 percent on Monday.
Tuesday's CORRA rate was at 4.2443 percent, down from 4.2498 percent on Monday. The Bank of Canada publishes the previous day's rate at around 9 a.m. daily.
The two-year bond was down 4 Canadian cents at C$101.25 to yield 3.558 percent. The 10-year bond dropped 3 Canadian cents to C$100.95 to yield 3.878 percent.
The yield spread between the two-year and 10-year bond was 32.0 basis points, down from 33.3 at the previous close.
The 30-year bond fell 20 Canadian cents to C$116.11 to yield 4.056 percent. In the United States, the 30-year treasury yielded 4.354 percent.
The three-month when-issued T-bill yielded 3.77 percent, unchanged from the previous close.
Editing by Bernadette Baum