* C$ eases ahead of Tuesday's Bank of Canada rate decision
* Oil drops below $35 a barrel as supply worries fade
* Bonds lower ahead of interest rate announcement
By Jennifer Kwan
TORONTO, Jan 19 (Reuters) - The Canadian dollar edged lower against the U.S. currency on Monday as the price of oil, a key Canadian export, dropped below $35, and the market braced for the Bank of Canada's interest rate decision on Tuesday.
Canadian government bond prices were lower across the board on supply concerns.
The Canadian currency finished at C$1.2547 to the U.S. dollar, or 79.70 U.S. cents, down from C$1.2480 to the U.S. dollar, or 80.13 U.S. cents, on Friday, with market activity subdued because U.S. markets were closed for Martin Luther King Jr. Day.
"I characterize it as a fairly steady currency with the U.S. out on a holiday, sort of resulting in thinner markets," said Paul Ferley, assistant chief economist at Royal Bank of Canada.
"With respect to Canada, generally, we're just awaiting for the Bank of Canada (rate) announcement tomorrow. A 50 basis point cut is widely expected, but markets are poised for a potentially more aggressive move and or suggestions in terms of whether future rate cuts can be expected."
A Reuters poll released late last week predicted the Bank of Canada will cut rates by at least 50 basis points to 1.0 percent to combat the global slowdown, which the central bank said has pushed the country into recession.
A drop in the oil price on Monday to below $35 a barrel pushed down the Canadian dollar. Concerns over crude supplies eased on signs of a resolution in the gas dispute between Russia and Ukraine and on the cease-fire in Gaza. [ID:nSP387382].
Weakness in the Canadian currency was also fueled in part by firmness in the U.S. dollar, which was helped by safe-haven buying amid a grim outlook for the global banking sector. [FRX/]
Canadian government bond prices were largely lower in muted activity ahead of the Bank of Canada rate decision, said Ferley.
Investors were also looking ahead to the Jan. 27 federal budget, which is expected to contain stimulus measures.
"All this talk about fiscal stimulus does have negative implications for deficit and debt, which is a factor that could be weighing on fixed-income markets generally through North America," Ferley said.
Estimates of Canada's budget deficit in the coming year have ranged as high as C$40 billion.
The two-year bond edged 8 Canadian cents lower to C$103.22 to yield 0.998 percent, while the 10-year bond dropped 72 Canadian cents to C$112.71 to yield 2.703 percent.
The 30-year bond fell C$1.35 to yield 3.610 percent. In the United States, the 30-year treasury yielded 2.9143 percent.