TORONTO (Reuters) - The Canadian dollar fell against the U.S. dollar on Monday, as weary investors were loath to bet on the currency despite a report showing the economy grew slightly faster than the market expected in January.
Domestic bond prices rose due to Canada's strong economic ties to the faltering U.S. economy, all but ignoring January's gross domestic product report.
At 9:29 a.m. EDT, the Canadian unit was at C$1.0250 to the U.S. dollar, or 97.56 U.S. cents, down from C$1.0215 to the U.S. dollar, or 97.90 U.S. cents, at Thursday's close.
Canada's economy bounced back in January after a contraction in December with broad-based growth, including in areas like auto manufacturing and wholesale trade, Statistics Canada said.
Gross domestic product grew 0.6 percent, beating expectations of 0.5 percent growth. That's the biggest monthly increase since April 2005 and nearly offsets the 0.7 percent slide in December.
The lack of a market response to the news shows how out of favor the Canadian dollar has become, said Doug Porter, deputy chief economist at BMO Capital Markets.
"A market that doesn't respond bullishly to bullish news isn't bullish and we saw a classic example of that this morning where a relatively upbeat GDP report, even though it was largely as expected, really didn't support the currency at all."
Fears that the Canadian economy will be dragged lower by the economic woes in the United States have weighed on the Canadian dollar, despite robust prices for the commodities the country exports.
The Canadian dollar has dropped 3.3 percent so far in 2008. In 2007, it surged around 17.5 percent against the U.S. dollar. Around 75 percent of Canadian exports go to the United States.
As U.S. demand evaporates and the Canadian dollar sticks around parity with the greenback, trade is seen dragging on growth in 2008.
On Wednesday, Bank of Canada Senior Deputy Governor Paul Jenkins will most likely touch on that theme when he delivers a speech to the London Chamber of Commerce on "Trends and challenges in the global economy and what they mean for Canada and Ontario."
The main data events for the week will be the March jobs reports in Canada and the United States on Friday.
Bond prices dipped briefly on the domestic growth data, but then followed the larger U.S. market higher as credit worries persisted.
"I'm surprised that the GDP number didn't have more of a lasting impact, because it is quite a pop," said Carlos Leitao, economist at Laurentian Bank of Canada.
Despite the strong links between the Canadian and U.S. economies, Leitao believed the outlook for the Canadian economy was too gloomy and bond yields should soon be moving higher.
The two-year bond rose 6 Canadian cents to C$102.75 to yield 2.550 percent. The 10-year bond rose 18 Canadian cents to C$104.48 to yield 3.425 percent.
The yield spread between the two- and 10-year bonds was 87.5 basis points, up from 87.0 points at the previous close.
The 30-year bond was up 28 Canadian cents at C$118.34 to yield 3.936 percent. In the United States, the 30-year Treasury yielded 4.313 percent.
The three-month when-issued T-bill yielded 1.88 percent, down from 1.90 percent at the previous close.
Editing by Bernadette Baum