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TORONTO (Reuters) - The dollar rose against the U.S. dollar on Monday as the price of oil, a key Canadian export, closed at a record high.
Canadian bond prices retreated from earlier highs to finish mixed in response to rebounding equities markets.
The Canadian dollar closed at C$1.0196 to the U.S. dollar, or 98.08 U.S. cents, up from C$1.0234 to the U.S. dollar, or 97.71 U.S. cents, at Friday's close.
U.S. crude oil futures settled at $111.76 a barrel, boosted by a weaker greenback and supply disruptions ahead of the U.S. summer driving season.
Strength in the Canadian dollar was tempered, however, by a Bank of Canada business survey that showed that Canadian businesses are gloomier about the near-term future due to a slowing economy and tighter credit conditions.
The survey supports the view that more interest rate cuts are needed to keep the economy out of recession as it gears down.
The Bank of Canada has cut its key lending rate by one percentage point since December to 3.5 percent. A Reuters survey showed that the majority of Canada's primary securities dealers expect the bank to shave a half-point off the overnight rate for a second straight time next week.
It survey also showed that businesses are concerned about the rising costs of energy and food, a topic that will be in the spotlight on Thursday, when Canadian inflation data for March is released.
"Inflation will certainly be the big topic for the currency markets," said Camilla Sutton, currency strategist at Scotia Capital.
On top of the Canadian figures, the United States, Britain, and the euro-zone are also set to release inflation data this week.
"There will be a refocus on how globally there are inflation pressures, with the exclusion being Canada and I think that should work in Canada's favor," Sutton said.
Canada's inflation level has been on the low side of the Bank of Canada's target range of 1 to 3 percent in recent months, bucking the trend of most other wealthy nations and giving the central bank room to cut rates to stimulate the slowing economy.
Canadian bond prices ended mixed as investors pulled back from an early rally in response to a turnaround in equity markets.
Stock markets opened lower in response to an unexpected quarterly loss by U.S. bank Wachovia Corp WB.N due to the global credit crunch.
Canadian stocks fully recovered and U.S. stocks partially rebounded during the day, however, diminishing the safe-haven appeal of government debt.
"I don't think the market is overreacting to the Wachovia results yet because there could be more fireworks later this week," said Sheldon Dong, fixed income analyst at TD Waterhouse Private Investment.
Nervous investors now await results from U.S. financial heavyweights JP Morgan Chase & Co (JPM.N), Merrill Lynch MER.N and Citigroup (C.N), which could trigger a rally in bonds if they also suffer earnings disappointments.
The two-year bond climbed 6 Canadian cents to C$102.26 to yield 2.649 percent. The 10-year bond fell 11 Canadian cents to C$103.37 to yield 3.563 percent.
The yield spread between the two- and 10-year bonds was 91.4 basis points, up from 87.1 basis points at the previous close.
The 30-year bond fell 50 Canadian cents to C$115.50 to yield 4.084 percent. In the United States, the 30-year Treasury yielded 4.084 percent.
The three-month when-issued T-bill yielded 2.38 percent, unchanged from the previous close.
Editing by Peter Galloway