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TORONTO (Reuters) - The Canadian dollar ended lower against its U.S. counterpart on Wednesday after a cautious assessment from the U.S. Federal Reserve fueled concern about economic recovery.
In the minutes of a policy meeting released on Wednesday afternoon, the U.S. central bank sparked concern by suggesting additional measures may be needed if an already softening economic outlook were to take a turn for the worse.
The assessment sparked jitters on financial markets and helped to push down the price of oil, a key Canadian export, as well as pressure U.S. stocks, typically a barometer of risk appetite.
"I sense that the dovish tone may have caused a bit of concern on the part of investors, so we're seeing now more of a risk aversion trade with Treasuries higher and risk assets such as the Canadian dollar being sold off," said Millan Mulraine, economics strategist at TD Securities.
"The fact that they thought about (additional measures to boost the economy), injected it as part of the discussion ... does suggest that there perhaps might be a chance they can do it if economic conditions aren't sufficient."
Also weighing on investor sentiment was weak U.S. retail sales data for June, the latest in a series of reports to suggest U.S. economic recovery has slowed in the past few months.
The Canadian dollar finished at C$1.0341 to the U.S. dollar, or 96.70 U.S. cents, backing off a session high of C$1.0286 to the U.S. dollar, or 97.22 U.S. cents. The currency finished slightly down from Tuesday's close of C$1.0337 to the U.S. dollar, or 96.74 U.S. cents.
The next key event for the market will be the Bank of Canada's interest rate announcement on July 20, and market expectations lean toward a rate increase, said Sacha Tihanyi, currency strategist at Scotia Capital.
Canadian primary dealers and global forecasters surveyed by Reuters said the Bank of Canada will raise its key overnight interest rate next week, but that the pace of subsequent hikes is less clear.
In a separate poll, economists said Canada's economy will expand at a fast enough clip this year to prompt the Bank of Canada to continue raising rates, but growth is expected to slow in 2011.
Yields on overnight index swaps, which trade based on expectations for the Bank of Canada's key policy rate, are pricing in an 90.8 percent likelihood of a July 20 rate hike.
Canadian government bond prices were flat to slightly higher on Wednesday, tracking U.S. Treasuries, which rose on the Fed's softer economic outlook.
"It's a bit of support from the U.S. bond market to the Canadian market," said TD's Mulraine.
Canada's auction of 10-year bonds met with decent demand on Wednesday as the country's solid economic fundamentals drew international investors to safe-haven assets.
The two-year bond ticked 2 Canadian cents higher to yield 1.709 percent, while the 10-year bond was up 7 Canadian cents to yield 3.267 percent.
Canadian bonds underperformed U.S. issues. The yield on Canadian two-year bond was 110 basis points above its U.S. counterpart, compared with about 104 basis points in the previous session.
Additional reporting by Ka Yan Ng; editing by Peter Galloway