CANADA FX DEBT-C$ ends lower as Bernanke undercuts rally
* Fed comments knock C$ from near six-week high
* C$ unravels gains made after BoC rate decision
* Bond prices end mostly higher after early selloff (Recasts)
By Frank Pingue
TORONTO, July 21 (Reuters) - Canada's dollar closed lower versus the greenback on Tuesday as a cautious assessment of the U.S. economy by Federal Reserve Chairman Ben Bernanke yanked it from the near six-week high it charged to after a more optimistic statement from the Bank of Canada.
The abrupt turnaround in the currency coincided with Bernanke's sobering remarks on the U.S. economy during testimony before the House Financial Services Committee. [ID:nWEQ001226]
The comments offered a boost to the U.S. dollar due to its safe-haven appeal and forced the Canadian dollar to relinquish the gains it made after the Bank of Canada softened the hard tone it had taken toward a surge in the currency last month.
Bernanke said U.S. unemployment was likely to remain high into 2011, which he warned could undermine consumer confidence and derail an economic recovery.
"I would clearly give the credit to Mr. Bernanke," Steve Butler, director of foreign exchange trading at Scotia Capital, said when asked to explain the slide in the Canadian dollar.
"Just the whole idea that (U.S.) rates will stay low for a long period of time I guess diffuses some of the hope that things were coming along faster than we were expecting."
The Canadian dollar closed at C$1.1071 to the U.S. dollar, or 90.33 U.S. cents, down from C$1.1068 to the U.S. dollar, or 90.35 U.S. cents, at Monday's close.
Earlier in the session the Canadian currency rallied to C$1.0965 to the U.S. dollar, or 91.19 U.S. cents, which was its highest level since June 11.
The move higher came after the Bank of Canada stuck to its conditional pledge and left its key interest rate steady at the historic low of 0.25 percent. [ID:N21196742]
Also driving the gain were comments the central bank made in its statement that a stronger currency and industrial restructuring were "significantly moderating the pace of overall growth". Those words were softer than the bank's June statement, when it said the "unprecedentedly rapid rise" in the currency could "fully offset" positive factors.
The bank's statement also included a rosier economic outlook, including a forecast that the economy will shrink by 2.3 percent in 2009, not the 3.0 percent it forecast in April; and will grow by 3.0 percent in 2010 rather than the 2.5 percent it had forecast earlier.
"I think the market was expecting some more forceful language with respect to the currency, which was not received," said Jack Spitz, managing director of foreign exchange at National Bank Financial.
"So it opened the door just a bit more in terms of the acquiescence from the bank with respect to Canadian dollar appreciation, and the immediate price action tells the story."
The Canadian dollar is up about 18 percent since it tumbled to a four-year low of C$1.3066 to the U.S. dollar, or 76.53 U.S. cents, in early March.
BOND PRICES MOSTLY HIGHER
Canadian bond prices rallied off early lows to end the session higher across most of the curve as Bernanke's comments gave a bid to secure government debt.
The bounce in Canadian bonds largely followed the surge in the bigger U.S. Treasury market after Bernanke cautioned about economic weakness.
"Bernanke's comments reaffirmed that we should not expect rate hikes for quite some time and he dampened inflation expectations by suggesting it should be no problem for the Fed to mop up the excess liquidity in due time," said Sal Guatieri, senior economist BMO Capital Markets.
Guatieri also said Bernanke's warning that American consumer spending is at risk due to large job losses and falling home prices supported the bond market as well.
The two-year Canada bond ended up 6 Canadian cents at C$100.11 to yield 1.189 percent, while the 10-year bond rose 15 Canadian cents to C$102.75 to yield 3.407 percent.
The 30-year bond moved off its earlier low but still ended lower, down 5 Canadian cents at C$117.30 to yield 3.968 percent. The 30-year U.S. Treasury bond yielded 4.389 percent.
Canadian bonds underperformed their U.S. counterparts across most of the curve. The Canadian 30-year bond was about 42 basis points below the U.S. 30-year yield, compared with 55 basis points on Friday. (Editing by Peter Galloway)
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