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* Canadian dollar slightly weaker after early rise
* Canada retail sales drop more than expected
* Bonds higher across the curve
* (Adds details, quote)
By Jennifer Kwan
TORONTO, Feb 23 (Reuters) - The Canadian dollar was slightly lower against the U.S. dollar on Monday, as data showing a big drop in December retail sales reinforced expectations the Bank of Canada will cut interest rates next week.
Retail sales tumbled 5.4 percent in December, Statistics Canada reported on Monday, marking the biggest monthly drop since 1991 and more than twice what was expected. [ID:nN23330217]
"What takes precedence is the dismal retail sales numbers that we got this morning," said Charmaine Buskas, senior economics strategist at TD Securities.
"They definitely confirm that the Canadian economy is under a lot of pressure and it certainly assures the markets that another rate cut is coming from the Bank of Canada," Buskas said.
The data puts more pressure on the central bank to cut its key overnight rate by another half-point on March 3 to 0.50 percent. [ID:nN23330217]
The Canadian dollar finished at C$1.2513 to the U.S. dollar, or 79.92 U.S. cents, down slightly from Friday's Bank of Canada closing level of C$1.2493 to the U.S. dollar, or 80.04 U.S. cents.
At its lowest point, the currency hit 1.2558, or 79.63 U.S. cents, while at its highest point was at C$1.2350 to the U.S. dollar, or 80.97 U.S. cents, according to Thomson Reuters data.
"It challenges the view that our only problems are on the export side of the picture," Derek Holt, an economist at Scotia Capital said of retail data.
"We're seeing building evidence of weakness creep into the domestic economy and that's going to keep the Bank of Canada cutting," he said.
The Canadian unit also came under pressure from falling commodity prices, said Holt.
The U.S. dollar was also stronger against other currencies on Monday, rising to near a three month high against the yen, on expectations the U.S. government will take a big stake in struggling U.S. bank Citigroup (C.N). [ID:nN23344768]
"Against the U.S. dollar, there is an underlying theme of risk aversion in the market," said Matthew Strauss, senior currency strategist, RBC Capital Markets.
Investors are shunning riskier assets on concerns that government stimulus actions won't be enough offset the global recession.
Canadian bond prices were higher across the curve, as the retail sales figures pushed money out of equity markets and into safer government debt, analysts said.
"There's an awful lot of concern that perhaps we'll transition into yet another ugly phase in this crisis and that is upping the ante on the policymakers to come up with a new round of ideas," said Holt.
The interest-rate sensitive two-year bond was up 9 Canadian cents at C$102.75 to yield 1.171 percent, while the 10-year bond rose 26 Canadian cents to C$111.41 to yield 2.840 percent.
The 30-year bond climbed 45 Canadian cents to C$125.25 to yield 3.573 percent.
Canadian bonds outperformed U.S. treasuries across most of the curve. The Canadian 30-year bond yield was 5.50 basis points above its U.S. counterpart, compared with 1.60 basis points on Friday. (Reporting by Jennifer Kwan; editing by Rob Wilson)