December 14, 2007 / 2:55 PM / 10 years ago

Canada dollar ekes out gain on flows; bonds mixed

TORONTO (Reuters) - The Canadian dollar rose slightly against the U.S. dollar on Friday, bucking a global trend after strong U.S. consumer inflation data caused the greenback to rally against most currencies.

Canadian bond prices were mixed and U.S. treasuries fell, after the U.S. consumer price index for November rose at its fastest pace in more than two years and raised doubts about further Federal Reserve interest rate cuts.

The Canadian dollar closed at C$1.0170 to the U.S. dollar, or 98.33 U.S. cents, up from C$1.0201 to the U.S. dollar, or 98.03 U.S. cents, on Thursday.

The Canadian currency fell as low as 97.59 U.S. cents overnight, down 11.6 percent from its modern-day high of US$1.1039, hit on November 7.

But it rebounded at midday, gave back some gains, and eventually ended the session higher, despite the fact that most other currencies fell against the U.S. dollar, said David Powell, a currency analyst at IDEAglobal in New York.

“The selloff of the Canadian dollar has been pushing its limits and if you look at the price action in the foreign exchange markets today, it seems that (market players) are unwilling to bring the Canadian dollar any lower, given the large amount of ground that the currency has already given up over the past six weeks or so,” Powell said.

“I think the market is starting to think that perhaps the move has come quite far.”

Other strategists said that corporate and other flows likely played a role in the Canadian dollar’s buoyancy.

“Today’s move was not fundamentally based, because the fundamentals (economic data) suggest it should have traded in the other direction, so you’ve got to chalk it up to a flow-related move,” said Stewart Hall, market strategist at HSBC Canada.

Another factor helping boost the U.S. dollar globally may be the repatriation of funds by U.S. financial institutions before year-end, other observers said.

BONDS FALL AT SHORT END

Canadian bond prices were mixed, as shorter-dated maturities fell in tandem with the larger U.S. market, but longer-dated domestic issues rose slightly.

“You’ve got tough numbers coming out of the U.S. with regards to inflation, and that’s your greatest fear (for bondholders),” Hall said. However, some institutions such as pension plans still need to buy long-dated bonds, which could explain the price rise at the long end of the Canadian curve, he said.

The U.S. inflation data and a slowing U.S. economy present a conundrum for the Federal Reserve: higher inflation will make it difficult for the central bank to keep cutting interest rates to contain the U.S. economic slowdown.

The two-year bond fell 2 Canadian cents to C$100.58 to yield 3.938 percent. The 10-year bond slid 13 Canadian cents to C$98.98 to yield 4.131 percent.

The yield spread between the two-year and 10-year bond moved to 19.3 basis points from 21.4 at the previous close.

The 30-year bond rose 32 Canadian cents to C$113.11 to yield 4.218 percent. In the United States, the 30-year treasury yielded 4.658 percent.

The three-month when-issued T-bill yielded 3.91 percent, up from 3.88 percent at the previous close.

Reporting by Lynne Olver and John McCrank; Editing by Rob Wilson

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