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TORONTO (Reuters) - The Canadian dollar ended this week's rally against the U.S. dollar with a lower close on Friday as weak data and uncertainty about the size of an expected interest rate cut by the Bank of Canada next week dragged the currency from a three-month high.
Canadian bond prices finished higher across the curve as heightened concerns about a U.S. recession intensified investor appetite for the security of government debt.
The Canadian dollar closed at US$1.0158, valuing a U.S. dollar at 98.44 Canadian cents, down from US$1.0241, valuing a U.S. dollar at 97.65 Canadian cents, at Thursday's close.
The currency had rallied for four straight sessions to its highest level since November 19 before easing on Friday. The currency rose 2.9 percent on the week.
The decline in the Canadian dollar began overnight, but it picked up steam early in the North American session as economic data showed Canada fell into a current account deficit in the fourth quarter.
Also weighing on the Canadian currency were ongoing concerns about what impact a slowdown in the U.S. economy could have on Canada and debate about the size of the rate cut the Bank of Canada is expected to announce next week.
"The Canadian dollar shone earlier in the week on the crosses and we just gave a little bit of that back," said Steve Butler, director of foreign exchange trading at Scotia Capital. "There's a few what ifs on the back of everybody's mind so I think people are taking this opportunity to square up after such a big week."
The Bank of Canada will announce its interest rate decision on March 4. A Reuters poll conducted on Friday showed most of Canada's primary dealers expect a 50-basis-point cut in the overnight rate to 3.50 percent.
Despite the majority call for a 50-basis-point cut, dealers were still uncertain about what the central bank will do, with some saying it's a "tough call" and a "coin flip."
Lofty oil prices, which backed off a record high of $103.05 a barrel set earlier on Friday, helped to cushion the Canadian currency's retreat.
Canadian bonds ended up across the curve as dealers sought safety due to U.S. recession fears, while many braced for the Bank of Canada to make its biggest rate cut since late 2001.
The latest U.S. data, which showed consumer sentiment fell, pointed to a recession and allowed bonds to extend a recent rally that has been led this week mostly by the bigger U.S. Treasury market.
"A lot of indicators are pointing to the likelihood the U.S. is in recession," said Sal Guatieri, senior economist at BMO Capital Markets. "And I think the market is leaning toward 50 points, so that it probably supporting the bond market as well."
The two-year bond rose 24 Canadian cents to C$102.47 to yield 2.782 percent. The 10-year bond gained 51 Canadian cents to C$102.77 to yield 3.643 percent.
The yield spread between the two- and 10-year bond was 86.1 basis points, up from 77.0 basis points at the previous close.
The 30-year bond added 5 Canadian cents to C$115.35 to yield 4.094 percent. In the United States, the 30-year Treasury yielded 4.419 percent.
The three-month when-issued T-bill yielded 3.08 percent, down from 3.18 percent at the previous close.
Editing by Peter Galloway