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TORONTO, Dec 19 (Reuters) - The Canadian dollar rose against the U.S. dollar on Wednesday but stayed within a tight range, as illiquid markets before the holidays kept investors from making any big moves.
Bond prices rallied on more fallout from the crisis in the U.S. subprime mortgage sector and credit markets.
The Canadian dollar closed at C$1.0033 to the U.S. dollar, or 99.67 U.S. cents, up from C$1.0055 to the U.S. dollar, or 99.45 U.S. cents, at Tuesday's close.
The currency spent the entire North American session between 99.25 U.S. cents and 99.83 U.S. cents.
"The Canadian dollar has been stuck in a bit of a range here, but it does seem like it wants to do a little bit better," said Steve Butler, director of foreign exchange trading at Scotia Capital.
There has been steady interest in the Canadian dollar over the past several days, prompting Butler to suggest that the correction since the currency hit its modern-day high of US$1.1039 in November may be over.
"The fundamentals are still generally pretty good in Canada and I think the market is realizing that," he said.
But as traders, mutual fund managers, and corporate executives head off for the holidays, the market is becoming more illiquid, so any surprising data or market-moving news could magnify moves in the currency.
That creates a risky environment, and is prompting investors to square up positions and not take on anything big before year-end, analysts observed.
The last major Canadian data for the year -- October gross domestic product and retail sales -- are due to be released on on Friday.
Bond prices rose as credit market woes, a dominant theme since mid-August when the sub-prime mortgage meltdown prompted a credit crunch, led to a flight to government debt.
Standard and Poor's cut bond insurer ACA Financial to junk status and warned that the AAA ratings of larger bond issuers could come under pressure.
If ACA collapses, banks and brokers could be out billions of dollars in credit derivatives they bought from the company, analysts said.
"There are concerns about the impact on the capital ratios of banks," Mark Chandler, fixed income strategist at RBC Capital Markets, said.
"If the mortgage guarantees are no longer there, it would involve substantial write-downs for a number of banks."
ACA Capital has guaranteed a total of $26 billion in mortgage securities.
Several large banks are currently in talks about bailing out the troubled insurer.
Meanwhile, Morgan Stanley's reported $9.4 billion in mortgage-related write-downs in the fourth quarter, also prompting a run on government bonds.
Domestic data showed Canadian wholesale trade rose 0.5 percent in October from September, despite weak auto sales, according to Statistics Canada. In constant dollars, sales rose an even-stronger 2 percent, with prices -- much of them on imports -- falling 1.5 percent on the month.
The two-year bond rose 9 Canadian cents to C$100.88 to yield 3.771 percent. The 10-year bond gained 29 Canadian cents to C$100.13 to yield 3.983 percent.
The yield spread between the two-year and 10-year bond was 20.1 basis points, unchanged from the previous close.
The 30-year bond rose 89 Canadian cents to C$115.79 to yield 4.074 percent. In the United States, the 30-year treasury yielded 4.450 percent.
The three-month when-issued T-bill yielded 3.88 percent, unchanged from the previous close. (Editing by Jeffrey Jones)