TORONTO (Reuters) - Canada's dollar gave up early gains against its U.S. counterpart on Tuesday and closed only slightly higher as a warning about slowing global growth from the IMF weighed on the currency, offsetting support from rising oil prices and from bets that China will move to kick-start demand.
The International Monetary Fund said the global economic slowdown is worsening, and cut its growth forecasts for the second time since April. The IMF also warned U.S. and European policymakers that failure to fix their economies' ills would prolong the current slump.
The fund also said Canada's economic growth would be slower than it earlier forecast for both 2012 and 2013.
"When the IMF comes out and revises down global growth it can lead to a weaker Canadian dollar because global investors view Canada as an export-heavy, commodity-heavy economy," said Craig Alexander, chief economist at Toronto-Dominion Bank. "The Canadian economy is leveraged to the global business cycle."
The Canadian dollar closed at C$0.9786 to the U.S. dollar, or $1.0219, slightly stronger than its Friday close of C$0.9789, or $1.0216.
Most Canadian currency traders were away from their desks on Monday for the Canadian Thanksgiving holiday.
Canadian government bond prices rose broadly as investors sought safer assets, with the benchmark 10-year bond adding 2 Canadian cents to yield 1.805 percent. The two-year bond was unchanged to yield 1.138 percent.
Weakness in the Canadian currency was limited by an injection of more cash into China's money markets by the country's central bank and by comments from the bank's governor, which encouraged expectations that the world's second largest economy would take further steps to spark growth.
Oil prices also offered support. Oil jumped 2 percent to top $114 a barrel on Tuesday after two days of losses, with tensions in the Middle East and the risk of supply disruptions outweighing concerns about sluggish global demand. <O/R>
Canada is a major oil exporter, and rising energy prices tend to support its currency.
Some analysts said there was a sense in the market that there was little new in the IMF report, and that its impact might not last long.
"It's a hope that the global economy is not getting worse, that's what the view of the market is," said Charles St-Arnaud, Canadian economist and currency strategist at Nomura Securities in New York.
"The IMF is behind the curve, everyone knows the global economy is slowing, and I think there was some relief that the downgrade was in line with what markets were expecting," he said.
Toronto-Dominion's Alexander also suggested the IMF setback may be short-lived.
"The question is really how long that negative assessment lasts and I would suggest the next data point that is strong will be more than enough to offset any impact from the IMF report," he said.
Editing by Jeffrey Hodgson and Peter Galloway