Canadian dollar tumbles 1 pct as economy stalls
* Canadian dollar falls to lowest level since Aug. 20
* Second-quarter GDP up 0.3 pct, Q1 GDP revised lower
* Bonds mixed on diverging North American rate outlooks
By John McCrank
TORONTO, Aug 29 (Reuters) - The Canadian dollar fell 1 percent against the U.S. dollar on Friday as Canada's economy showed anemic growth in the second quarter, suggesting the Bank of Canada may have to cut interest rates again.
Domestic bond prices were mixed as data in Canada and the United States highlighted the diverging paths the central banks of the two countries are expected to take on monetary policy.
North American markets will be closed on Monday for the Labor Day holiday.
The Canadian dollar ended the North American session at C$1.0620 to the U.S. dollar, or 94.16 U.S. cents, down from C$1.0519, or 95.07 U.S. cents, at the end of Thursday's session.
The Canadian unit fell to its lowest level since Aug. 20 and was the worst performing major currency of the day.
The poor performance was mainly due to data that showed Canada's economy grew by a tepid 0.3 percent on an annualized basis in the second quarter, missing estimates of 0.7 percent growth. The economy's contraction in the first quarter was revised to 0.8 percent from 0.3 percent. See [ID:nN29445075]
"It sets the tone for a potential -- not probable -- but potential, Bank of Canada ease next Wednesday," said Jack Spitz, managing director of foreign exchange at National Bank Financial.
A Reuters poll taken after the GDP numbers were released showed that 11 of 12 Canadian primary securities dealers expect no move by the Bank of Canada on Sept. 3, but most acknowledged the next move it does make will likely be a cut. See [ID:nN29445610]
The central bank has lopped 150 basis points off its key lending rate, to 3 percent, since late last year in an attempt to spur economic growth in light of the U.S. downturn and the global credit crunch.
The Canadian rate outlook contrasts to the market view that the next move by the U.S. Federal Reserve will be a rate hike to reign in inflation.
Bonds prices fell at the long end of the curve along with the U.S. market on some firmer-than-expected U.S. economic data and a report that showed rising U.S. inflation. Those reports strengthened opinions that the next Fed move will be a hike.
Shorter-dated bonds managed to rise on the Canadian rate outlook.
"Tempering the impact (of the U.S. treasuries selloff) was some disappointment with our GDP numbers today, which were generally weaker than expected, particularly with respect to the downward revision in Q1," said Paul Ferley, assistant chief economist at RBC Capital Markets.
Two-year bond yields most closely reflect the bond market's expectations of where interest rates are going to end up.
Bond prices and bond yields move in opposite directions.
The two-year bond rose 5 Canadian cents to C$100.08 to yield 2.713 percent, while the 10-year slid 22 Canadian cents to C$105.85 to yield 3.534 percent.
The yield spread between the two-year and 10-year bond was 85.9 basis points, up from 77.2 at the previous close.
The 30-year bond dropped 26 Canadian cents to C$116.66 for a yield of 4.017 percent. In the United States, the 30-year treasury yielded 4.425 percent.
The three-month when-issued T-bill yielded 2.44 percent, down from 2.48 percent at the previous close. (Reporting by John McCrank; Editing by Ted Kerr)
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