* C$ finishes at 80.89 U.S. cents
* Bank of Canada cuts rate 25 basis points to 0.25 pct
* Bond prices mixed (Adds details, quotes)
By Jennifer Kwan
TORONTO, April 21 (Reuters) - The Canadian dollar rose against the U.S. dollar on Tuesday as rising oil prices and stock markets lifted the currency from the three-week low it hit earlier in the day after the Bank of Canada cut its benchmark interest rate to 0.25 percent.
The Bank of Canada cut its key overnight rate 25 basis points to a historic low from 0.50 percent and predicted a deeper recession than it had previously forecast [ID:nN21297335].
It also surprised the market by saying it will keep its key overnight rate at 0.25 percent until mid 2010 in an aggressive bid to boost the economy.
"What caught the market a little bit off guard was the statement that rates could stay this low as far as June 2010," said Firas Askari, head of foreign exchange trading at BMO Capital Markets.
After the central bank's announcement at 9:00 a.m. (1300 GMT), the currency dropped to C$1.2507 to the U.S. dollar, or 79.96 U.S. cents, its lowest level since April 2. The weakness coincided with U.S. stock index futures that pointed to a lower open on equities markets.
But after opening lower, North American stock markets gained traction after U.S. Treasury Secretary Timothy Geithner said the vast majority of U.S. banks are well capitalized [ID:nN21535633], and that helped power the Canadian currency higher.
"You saw people being caught short the Canadian dollar," Askari said. "You saw a bit of a mad rush for the door as many people went out and tried to buy back their short Canadian dollar exposures."
The price of oil CLc1, a key Canadian export, also turned positive and settled above $46 a barrel, tracking gains on Wall Street and as OPEC-member Iran said the cartel may need to restrict supplies further to thin global stockpiles. [ID:nSP465475]
The Canadian dollar finished at C$1.2363 to the U.S. dollar, or 80.89 U.S. cents, up from C$1.2385 to the U.S. dollar, or 80.74 U.S. cents, at Monday's close.
The market will pay close attention to the central bank's Monetary Policy Report, due for release on Thursday, in which it will outline a framework for unconventional measures, such as printing money to buy securities in the market, a policy referred to as quantitative easing.
Canadian bond prices were higher at the short end and flat to lower at the long end, pressured by concerns that the Bank of Canada's aggressive easing policy could fuel inflation over the long term.
"The fear of inflation is always what prompts a steeper curve when central banks cut," said Eric Lascelles, chief economics and rates strategist at TD Securities. "There is always a degree of legitimacy to that fear even if it doesn't transpire."
Lascelles said bond prices also tracked the big U.S. Treasury market, which fell as gains in stocks eroded the safe-haven bid for government debt. [ID:nN21435457]
The two-year Canada bond was up 13 Canadian cents at C$100.42 to yield 1.028 percent, while the 10-year bond retreated 17 Canadian cents to C$107.33 to yield 2.908 percent.
The 30-year bond fell 85 Canadian cents to C$122.65 to yield 3.697 percent. In the United States, the 30-year Treasury yielded 3.7473 percent.
Canadian bonds outperformed their U.S. counterparts across the curve, with the 30-year bond yield 5 basis points below its U.S. counterpart, compared with about 3.4 basis points below on Monday. (Reporting by Jennifer Kwan; editing by Peter Galloway)