CANADA FX DEBT-C$ weakest in more than 6 years after Bank of Canada rate cut

(Updates throughout with reaction and comments following Bank
of Canada rate decision)
    * Canadian dollar drops as low as 77.35 U.S. cents
    * Bond prices higher across the maturity curve

    By Solarina Ho
    TORONTO, July 15 (Reuters) - The Canadian dollar tumbled to
its weakest level against its U.S. counterpart since March 2009
on Wednesday after the Bank of Canada cut its key interest rate
for a second time this year as the economy struggles.
    The central bank announced a 25-basis-point cut to 0.5
percent, saying an unexpected economic contraction during the
first half of the year had added excess capacity and put
downward pressure on inflation.
    "We were calling for a rate cut so we're not shocked, but it
was admittedly a very close call, and clearly the market was not
fully expecting this and we've seen a big reaction in both bonds
and especially the Canadian dollar," said Doug Porter, chief
economist at BMO Capital Markets.
    "Clearly the economy has disappointed in a significant way
through the first half of the year, and it is not entirely due
to the oil shock."
    At 10:33 a.m. EDT (1433 GMT), the Canadian dollar 
was at C$1.2902 to the greenback, or 77.51 U.S. cents,
significantly weaker than its level just before the central bank
announced the rate move, and sharply off the Bank of Canada's
official close of C$1.2740, or $78.49 U.S. cents, on Tuesday.
    The currency weakened to as much as C$1.2929, or 77.35 U.S.
cents, after the announcement.
    The cut stands in sharp contrast to the U.S. Federal
Reserve, which reiterated its intention on Wednesday to hike
interest rates this year. 
    "The currency is in uncharted waters here. If the Fed is
hiking, we think by September, and the Bank of Canada appears to
be leaving the door open to additional rate stimulus all bets
are off," said Scotiabank economist Derek Holt. 
    "You face the material risk that the currency overshoots and
goes to C$1.30 and keeps on climbing to C$1.40."
    In addition to driving the Canadian dollar to more than
six-year lows, the move spurred gains in Canadian government
bond prices, which outperformed U.S. Treasuries. 
    The bond prices, which were lower before the decision, rose
across the maturity curve. The two-year price was up
11.5 Canadian cents to yield 0.403 percent and the benchmark
10-year rose 37 Canadian cents to yield 1.612
    The Canada-U.S. two-year bond spread widened to -26.4 basis
points, while the 10-year spread widened to -79.6 basis points.

 (Additional reporting by Andrea Hopkins and Alastair Sharp;
Editing by Peter Galloway)