TORONTO (Reuters) - The Canadian dollar closed at a six-week high against the U.S. dollar on Tuesday after briefly popping above parity with the greenback in overseas trade before slipping back on economic concerns emanating from the United States.
Canadian bond prices closed mostly higher, taking their cue from falling stock markets and largely shrugging off the Bank of Canada's decision to hold interest rates steady, which had been expected.
The Canadian dollar closed at C$1.0023, or 99.77 U.S. cents, up from C$1.0052 to the U.S. dollar, or 99.48 U.S. cents, at Monday's close.
During the overseas session, the currency rose as high as US$1.0022, valuing a U.S. dollar at 99.78 Canadian cents, its strongest level since June 3.
The push higher was mainly due to U.S. dollar weakness. The greenback lost ground against a number of currencies as investors second-guessed the U.S. government's plan to boost confidence in the financial system.
U.S. Federal Reserve Chairman Ben Bernanke said in a speech on Tuesday that restoring financial market stability was a top priority for the central banks, adding that financial markets and institutions remain under considerable stress.
Over the weekend the U.S. government introduced a package to shore up Freddie Mac and Fannie Mae, the two largest U.S. providers of mortgage funding.
The Canadian currency barely reacted to the Bank of Canada's announcement that it would leave its key rate steady at 3.00 percent. The bank pointed to risks coming from the soft U.S. economy, but also said inflation could rise above 4 percent for the first time since 2003.
"I think they were fairly neutral, but at the same time, there still seems to be a lot of overhang in the market of worry and I certainly think that was emphasized," said Steve Butler, director of foreign exchange at Scotia Capital.
The central bank's Monetary Policy Report Update and press conference on Thursday will give more details on its assessment of the economy.
Canadian bond prices ended mostly higher as sharp stock market declines upped the demand for safe-haven government debt, said Carlos Leitao, chief economist at Laurentian Bank of Canada.
The Toronto Stock Exchange's main index ended down 2.8 percent as energy stocks fell on softer oil prices and financials were hit by economic concerns.
The two-year bond rose 11 Canadian cents to C$101.24 to yield 3.062 percent. The 10-year bond climbed 25 Canadian cents to C$104.70 to yield 3.677 percent.
The yield spread between the two-year and 10-year bond was 61.5 basis points, up from 58.9 basis points, unchanged from the previous close.
The 30-year fell 26 Canadian cents to C$115.79 for a yield of 4.065 percent. In the United States, the 30-year treasury yielded 4.461 percent.
The three-month when-issued T-bill yielded 2.27 percent, down from 2.31 percent at the previous close.
Editing by Peter Galloway