December 4, 2007 / 1:09 AM / in 10 years

Canadian dollar rattled by Bank of Canada rate cut

<p>Newly pressed Canadian one dollar coins, also know as loonies, at the Royal Canadian Mint in Winnipeg November 14, 2007. REUTERS/Fred Greenslade</p>

TORONTO (Reuters) - The Canadian dollar finished at its lowest level in 11 weeks versus the greenback on Tuesday as the Bank of Canada went against market expectations and cut its key interest rate for the first time since early 2004.

Canadian bond prices closed higher across the short end of the curve, but the bank’s lack of signals regarding what it will do when it sets policy in January ate away at the gains as the session wore on.

The Canadian dollar closed at 98.77 U.S. cents, valuing each U.S. dollar at C$1.0124, down from 99.98 U.S. cents, or C$1.0002, at Monday’s North American close.

The Canadian dollar hit a session low of 98.49 U.S. cents, or C$1.0153, right after the Bank of Canada lowered its overnight rate to 4.25 percent from 4.50 percent.

In the statement that accompanied its decision, the bank delivered a more dovish tone than it did when it left interest rates unchanged in October.

“Not only did they surprise the market but they also included a statement whose tone was somewhat dovish,” said David Powell, currency analyst at IDEAglobal in New York.

“In other words, they left the door open for further cuts in the first quarter of next year and likely into the second quarter as well.”

The Bank of Canada said it expects the U.S. subprime mortgage market and financial market fallout to drag on longer than expected.

The Canadian dollar is now well off the modern-day high of US$1.1039 that it reached on November 7, bogged down by a sudden wave of weak domestic data and also by concerns with the global economic picture.

BONDS RALLY ON SHORT END

Short-term Canadian bond prices rallied on the interest rate cut, but the lack of central bank signals on whether it will continue easing in the near future may have limited gains.

Now, direction in the bond market will likely be dictated by an appearance before a parliamentary committee on Wednesday by Bank of Canada Governor Designate Mark Carney and by Bank of Canada Governor David Dodge on Thursday.

“If there is a greater degree of worry in either Mark Carney’s testimony (Wednesday) or Governor Dodge’s on Thursday. then there is the chance for the market to do better on those comments,” said Mark Chandler, fixed income strategist at RBC Capital Markets.

Both Carney and Dodge will be speaking ahead of key jobs data due out of Canada and the United States on Friday.

The two-year bond rose 13 Canadian cents to C$101.45 to yield 3.485 percent. The 10-year bond climbed 18 Canadian cents to C$101.05 to yield 3.867 percent.

The yield spread between the two-year and 10-year bond moved to 38.2 basis points from 33.1 at the previous close.

The 30-year bond dropped 16 Canadian cents to C$115.66 to yield 4.080 percent. In the United States, the 30-year treasury yielded 4.336 percent.

The three-month when-issued T-bill yielded 3.83 percent, down from 3.91 percent at the previous close.

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