CANADA FX DEBT-C$ rises as oil gains, gov't avoids defeat

Wed Jan 28, 2009 5:33pm EST
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* Higher oil prices key driver behind C$'s gain

* Muted reaction to priced-in Canada political news

* C$ backs off 2-week high after Fed statement

* Bond prices drop as stocks gain, supply concerns (Recasts with closing numbers)

By Frank Pingue

TORONTO, Jan 28 (Reuters) - Canada's dollar closed higher on Wednesday as oil prices rose and the country's Conservative government avoided defeat, but the currency fell from session highs after a market-moving U.S. Federal Reserve statement.

Late in the session the Canadian currency looked primed for a hefty gain of about 1.5 percent, but did an about face after the Fed said it was prepared to keep using unconventional tools to help the U.S. economy from deteriorating further.

"The (U.S.) dollar basically just turned on its tail and obviously the FOMC meeting sparked that," said David Watt, senior currency strategist at RBC Capital Markets.

"You basically had the Fed indicating that they will do everything they can to keep rates at zero for a long time ... and do everything they can to spark an economic rebound."   Continued...