By Frank Pingue
TORONTO, March 4 (Reuters) - The Canadian dollar skidded to its lowest level in a week against the U.S. dollar on Tuesday after the Bank of Canada lowered its key interest rate and signaled further rate cuts are to come.
Domestic bond prices, which rallied for much of the past week in anticipation of the bank's first 50-basis-point cut since late 2001, rallied on the short end of the curve given the bank's dovish tone.
At 10:00 a.m. (1500 GMT), the Canadian dollar was at US$1.0081, valuing a U.S. dollar at 99.20 Canadian cents, down from US$1.0116, valuing a U.S. dollar at 98.85 Canadian cents, ahead of the bank's rate announcement.
The currency closed at US$1.0118, valuing a U.S. dollar at 98.83 Canadian cents, on Monday.
The Bank of Canada did as expected and lowered its key rate by 50 basis points to 3.50 percent, but its statement left the door wide open for further rate cuts given the damaging effects of the U.S. slowdown.
In its statement, the central bank said further monetary stimulus is likely required as the nagging U.S. economic slowdown has outweighed the "upside risks" of strong domestic demand and capacity pressures.
"What caught the market by surprise was the dovish statement afterward which clearly opens the way for further monetary easing and even aggressive easing," said Matthew Strauss, senior currency strategist at RBC Capital Markets.
"So we could see similar cuts to what we've seen today if the economic outlook continues to deteriorate."
The currency is now on track for its third straight losing session, during which it has handed back nearly all of the 2.9 percent gain recorded last week as commodity prices rallied.
Canadian bond prices moved higher on the short end of the curve immediately after the Bank of Canada statement filtered through the market.
"The fact that the statement called for continued easing down the road, they kept the same bias that they had before, helped," said Mark Chandler, fixed income strategist at RBC Capital Markets. "Some of it had become priced in over the last week but you still got a positive impact on bonds."
The overnight Canadian Libor rate LIBOR01 was 3.7433 percent, down from 4.053 percent on Monday.
Monday's CORRA rate CORRA= was 4.0107 percent, down from 4.0191 on Friday. The Bank of Canada publishes the previous day's rate at around 9 a.m. daily.
The two-year bond was up 7 Canadian cents at C$102.65 to yield 2.676 percent. The 10-year bond slipped 3 Canadian cents to C$102.95 to yield 3.620 percent.
The yield spread between the two- and 10-year bond was 94.4 basis points, up from 90.2 points at the previous close.
The 30-year bond dipped 30 Canadian cents to C$115.25 to yield 4.100 percent. In the United States, the 30-year Treasury yielded 4.447 percent.
The three-month when-issued T-bill yielded 2.95 percent, down from 2.98 percent at the previous close. (Reporting by Frank Pingue; Editing by Bernadette Baum)