CANADA FX DEBT-C$ firms on equities, oil; dovish BoC boost bonds
* C$ at C$1.0493 to U.S. dollar, or 95.30 U.S. cents
* Bond prices rise after dovish BoC statement (Updates to afternoon)
By Claire Sibonney
TORONTO, July 20 (Reuters) - The Canadian dollar strengthened on Tuesday, taking its cue from recovering equity and commodity markets, after the Bank of Canada's interest rate hike initially failed to attract more bids for the currency.
North American indexes rebounded from session lows and oil rose ahead of weekly inventory reports expected to show crude supplies fell last week, driving the commodity-linked currency CAD=D4 to touch a session high of C$1.0480 to the U.S. dollar, or 95.42 U.S. cents. [.N] [O/R]
Working against the currency, the country's central bank warned that economic recovery at home and abroad will be slower than thought, foreshadowing a more hesitant pace of rate hikes from now on. [ID:nN20251478]
"If it was not for the price of oil increasing, we could have seen a small decrease in the Canadian dollar," said Yanick Desnoyers, economist at National Bank Financial in Montreal.
The bank last month became the first in the Group of Seven advanced economies to raise rates from the emergency lows introduced during the global crisis. It took a second step on Tuesday by lifting borrowing costs another 25 basis points to 0.75 percent.
Canada's blistering growth rate and jobs growth had led primary securities dealers to unanimously predict another rate hike, putting Canada leagues ahead of the U.S. Federal Reserve and other G7 central banks who are not yet ready to end the era of easy money.
"We were a bit surprised by the fact that they did not address the strength of the labor market. Actually, we are the only G7 country where the employment level is now around its pre-recession one," added Desnoyers.
"There was a lack of conviction clearly in this press release ... but we still think that domestic developments should be strong enough going forward."
At 1:12 p.m. (1712 GMT), the Canadian dollar CAD=D4 was at C$1.0493 to the U.S. dollar, or 95.30 U.S. cents, up from Monday's finish of C$1.0549 to the U.S. dollar, or 94.80 U.S. cents.
After the bank's rate announcement, the currency had initially weakened.
"Markets are a little lost in the sense that there are other concerns," said Carlos Leitao, chief economist at Laurentian Bank of Canada, in Montreal.
"This decision had been totally anticipated so it was no surprise and the focus is still on what is going on in the United States."
U.S. housing starts hit their lowest level in eight months in June, data on Tuesday showed, further evidence the economy lost momentum in the second quarter, but a rise in permits offered hope of a pick up in homebuilding. [ID: nN20249501]
BOND PRICES UP ACROSS THE CURVE
Short-term money market rates rose after the tightening, but bond yields mostly fell. The yield on the two-year Canadian government bond CA2YT=RR dropped to 1.490 percent from 1.514 percent just before the news.
"The markets were widely expecting a dovish commentary. It may result in some modest further rallying in the bond market," said Sheryl King, chief Canadian economist at Bank of America Merrill Lynch.
The 10-year bond CA10YT=RR extended gains, with the yield falling to 3.149 percent from 3.158 just before the rate announcement. (Reporting by Claire Sibonney; Editing by Jeffrey Hodgson)
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