Canada dollar weakens as U.S. data sours mood

Thu May 3, 2012 4:33pm EDT
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By Jennifer Kwan

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.   Continued...

An image of the front of the new Canadian 50 dollar bill, made of polymer, is seen on display before a news conference in Quebec City, March 26, 2012. REUTERS/Mathieu Belanger