TORONTO (Reuters) - Canada's dollar fell against its U.S. counterpart on Thursday as weaker-than-expected economic data raised concerns about the outlook for the country's largest trading partner ahead of a key U.S. labor report due on Friday.
Markets faltered after data showed tepid growth in the U.S. services sector. Stocks turned lower, government debt pared losses and the U.S. dollar trimmed gains against the yen after the Institute for Supply Management said its services sector index fell to 53.5 in April from 56.0 in March.
The currency, which had been a relative outperformer against the G10 currencies on ramped-up expectations of a Bank of Canada rate hike, got caught up in the downward spiral.
"The ISM was a little softer than people expected and is probably weighing on sentiment a little bit. A weaker U.S. economy does not bode well for Canada so that probably accounts for a little bit of the underperformance," said Benjamin Reitzes, senior economist and foreign exchange strategist at BMO Capital Markets.
"We've seen expectations for the Bank of Canada back off of late so you may be seeing a reversal of long Canadian dollar positions as those expectations come off," he added.
The Canadian currency finished at C$0.9889 versus the greenback, or $1.0112, down slightly from its Wednesday finish at C$0.9865 against the greenback, or $1.0137.
Canada's dollar outperformed slightly against the New Zealand and Australian dollars, as well as the Mexican peso and Swedish crown. However, it was weaker against other majors including the euro and Japanese yen.
Canada has held up well in recent weeks on comments by the Bank of Canada. The central bank surprised investors last month with a more positive domestic economic outlook and an explicit warning that it may have to start raising rates again from its current 1 percent.
"Canada has more or less held gains since the Bank of Canada. There's a myriad of reasons why one would want to buy Canada from a relative value perspective looking at the economics, the hawkish stance by the bank," said Jack Spitz, managing director of foreign exchange at National Bank Financial, who saw the currency sticking in a range of C$0.9800 and C$0.9900 against the greenback.
But those rate hike expectations are easing. After soaring to a seven-month high in April on more hawkish language from the central bank, the Canadian dollar will trade at softer levels in coming months and weaken to parity with the U.S. dollar a year from now, a Reuters poll showed.
Economic reports have been mixed in recent weeks, giving investors no clear signal on the strength of the North American economic recovery. As well, flare-ups in the European debt crisis have given traders pause.
All eyes will be on key U.S. jobs data due on Friday.
Nonfarm payrolls data is expected to show hiring by U.S. employers rebounded in April, which could ease fears that the economy has stumbled into a soft patch.
Businesses outside the farm sector are expected to have added 170,000 jobs last month, according to a Reuters survey, after rising a meager 120,000 in March. The unemployment rate is seen holding at a three-year low of 8.2 percent.
Canadian bond prices were mostly higher across the curve with Canada's two-year bond up 2 Canadian cents to yield 1.303 percent, while the benchmark 10-year bond was up 20 Canadian cents to yield 2.086 percent.
Editing by James Dalgleish