By John McCrank
TORONTO, March 14 (Reuters) - The Canadian dollar ended almost unchanged against the U.S. dollar after a tumultuous session on Friday, as the drag of some weaker than expected domestic data was offset by softness in the greenback.
Domestic bond prices were well bid as more bad news on the credit market front ramped up investors' angst, leading to a selloff in stocks and a run on government debt.
The Canadian dollar closed at US$1.0140, valuing a U.S. dollar at 98.62 Canadian cents, down slightly from US$1.0146, valuing a U.S. dollar at 98.56 Canadian cents, at Thursday's close.
For the week, the rangebound Canadian currency eked out a 0.3 percent gain.
An early morning bout of profit-taking started the session off, causing the Canadian dollar to quickly sag around 1 percent.
Shortly after the drop, data showed labor productivity in Canada fell 0.8 percent in the fourth quarter from the previous quarter, its biggest quarterly decline since 1995.
"In a way, we knew what the story was going to be because the latest employment report was so strong while GDP growth wasn't, so something had to give," said Carlos Leitao, chief economist at National Bank Financial.
"Nevertheless, the extent of the decline in productivity was still surprising."
But instead of weakening further, the currency managed to retrace its losses against a besieged U.S. dollar.
"It is very much a broad-based bear theme for the U.S. dollar and the Canadian dollar managed to capitalize on that," said Gareth Sylvester, chief currency strategist at HIFX Plc in San Francisco.
Sylvester said he feels the Canadian dollar has the potential to breakout through US$1.0256, opening up a move toward the US$1.0526 area in the coming weeks.
"The fundamentals just remain a little stronger in Canada and, certainly, the yield advantage will widen when the Fed meets next week."
The U.S. Federal Reserve meets on Tuesday and most market players expect a 75 basis point cut to the central bank's key lending rate to 2.25 percent.
That would open up a 1.25 percentage point gap between interest rates in Canada and the United States in favor of a stronger Canadian dollar.
Canadian bond prices rallied as the weak domestic data and credit market worries added to the allure of safe-haven government debt.
JPMorgan Chase (JPM.N) and the New York Federal Reserve said they would provide emergency funds to a Bear Stearns BSC.N, the fifth-largest U.S. investment bank, because of liquidity problems.
The news sent Bear Stearns shares down as much as 50 percent and led to a selloff of financial shares in general, hitting North American stock markets hard and steering investors to bonds.
The two-year bond climbed 19 Canadian cents to C$103.02 to yield 2.428 percent. The 10-year bond rose 22 Canadian cents to C$104.02 to yield 3.485 percent.
The yield spread between the two- and 10-year bond was 105.3 basis points, up from 97.3 points at the previous close.
The 30-year bond gained 29 Canadian cents to C$116.84 to yield 4.015 percent. In the United States, the 30-year treasury yielded 4.365 percent.
The three-month when-issued T-bill yielded 2.23 percent, down from 3.30 percent at the previous close.