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By Frank Pingue
TORONTO, Jan 24 (Reuters) - The Canadian dollar shot to its highest level in just over a week against the U .S. dollar on Thursday given a late reaction to the favorable Canada-U.S. interest rate spread established earlier this week.
Domestic bond prices were higher across the curve ahead of the Bank of Canada's Monetary Policy Report Update that is expected to deliver a less rosy outlook on the economy.
At 8:30 a.m. (1330 GMT), the Canadian unit was at C$1.0165 to the U.S. dollar or 98.38 U.S. cents, up from C$1.0236 to the U.S. dollar, or 97.69 U.S. cents, at Wednesday's close.
Earlier, the Canadian dollar jumped to C$1.0130 to the U.S. dollar, or 98.72 U.S. cents, which marked its highest level since Jan. 15 and made up for some of the steep losses it has suffered in 2008.
The U.S. Federal Reserve announced an emergency rate cut earlier this week, and shortly after the Bank of Canada cut its key rate by a smaller amount, widening the interest-rate gap in Canada's favor.
But the move in the Canadian dollar following the two rate announcements was rather muted given the 50-basis-point spread in interest rates.
"We had a 50-basis-point swing in the Canada-U.S. interest rate spread on Tuesday and the (Canadian) currency did not appreciate by nearly as much as you might have expected on that factor," said Eric Lascelles, chief economics and rates strategist at TD Securities.
"I suppose there was a vulnerability towards a stronger Canadian dollar on that factor and we are certainly seeing it being manifested today."
The Canadian dollar's moves on Thursday will likely be dictated largely by moves in the North American stock markets, which are being viewed as a barometer of the economy.
Fears that a possible U.S. recession could slow the global economy and crimp commodity prices have weighed on the Canadian dollar recently given the nature of Canada's exports like oil, base metals, and timber.
Canadian bond prices were all higher ahead of the central bank's MPR Update that follows its comments earlier this week that its outlook for the U.S. economy is significantly weaker than it had forecasted in October.
"Just about every measure the Bank of Canada cares to gauge will be revised downward," said Lascelles. "Not that one should expect anything substantially more pessimistic than Tuesday, but it's hardly going to be a rosy assessment of the global or Canadian economies."
Bond prices also drew support from investors who fled risky assets like stocks in favor of more secure investments like government debt given the pressing concerns surrounding the U.S. economy.
The two-year bond was up 4 Canadian cents at C$101.91 to yield 3.171 percent. The 10-year bond rose 17 Canadian cents to C$101.10 to yield 3.858 percent.
The yield spread between the two-year and 10-year bond was 68.4 basis points, up from 67.9 points at the previous close.
The 30-year bond increased 40 Canadian cents to C$114.05 to yield 4.116 percent. In the United States, the 30-year Treasury yielded 4.256 percent.
The three-month when-issued T-bill yielded 3.41 percent, unchanged from the previous close.
(Editing by Renato Andrade)