TORONTO (Reuters) - The Canadian dollar fell against the U.S. dollar on Tuesday ahead of an expected interest rate cut and the central bank statement that will accompany that announcement.
Domestic bond prices followed larger U.S. market lower.
At 8:04 a.m. (1204 GMT), the Canadian dollar was at C$1.0086 to the U.S. dollar, or 99.15 U.S. cents, down slightly from C$1.0060 to the U.S. dollar, or 99.40 U.S. cents, at Monday's close.
"Canada has been relatively sidelined overnight and is a little bit weaker because the market is expecting a 50 basis point ease by the Bank of Canada," said Steve Butler, director of foreign exchange at Scotia Capital.
A solid majority of Canada's primary security dealers expect the central bank to cut its key overnight rate by 50 basis points to 3 percent, according to a Reuters poll conducted last week after figures showed that inflation slowed to 1.4 percent in March.
That figure -- the lowest inflation rate since July 2005 -- gives the Bank of Canada plenty of room to cut interest rates to boost growth without fear of fueling inflation.
The bank has cut its main lending rate by 100 basis points since December in an attempt to limit the impact of the U.S. slowdown on the Canadian economy.
The United States takes over three-quarters of Canadian exports, and exports make up around 40 percent of the Canadian economy.
Market players will look to the statement accompanying the rate announcement to try to gauge the Bank of Canada's future path.
"It should be an interesting report, because this is the one where they completely revise their economic outlook, their inflation outlook, their assessment of credit conditions, and so on," said Eric Lascelles, chief economics and rates strategist at TD Securities.
"There should be a lot of information in it and really set the path not just for the next six or so weeks, until the next decision, but longer than that, because they only revisit these forecasts every quarter or so."
Canadian bond prices followed the larger U.S. market lower ahead of a U.S. Treasuries auction, which tends to increase supply in the market.
Canadian bonds could rally if the Bank of Canada cuts less than the 50 basis points the market is expecting, said Lascelles.
The overnight Canadian LIBOR rate LIBOR01 was at 3.1717 percent, down from 3.4891 percent on Monday.
The two-year bond fell 4 Canadian cents to C$101.82 to yield 2.852 percent. The 10-year bond slipped 7 Canadian cents to C$102.50 to yield 3.673 percent.
The yield spread between the two- and 10-year bonds was 82.1 basis points, down from 82.9 basis points at the previous close.
The 30-year bond slid 20 Canadian cents at C$114.60 to yield 4.132 percent. In the United States, the 30-year treasury yielded 4.499 percent.
The three-month when-issued T-bill yielded 2.55 percent, unchanged from the previous close.
Editing by Janet Guttsman