* C$ closes at 98.87 U.S. cents
* Bonds lower but outperform Treasuries (Updates to close, adds details, quotes)
By Claire Sibonney
TORONTO, Dec 7 (Reuters) - The Canadian dollar retreated more than penny against the greenback on Tuesday as a global risk rally faded and the market digested a dovish statement from the Bank of Canada, which held interest rates unchanged for a second straight time.
The central bank, as expected, set the stage for keeping its key rate target at 1 percent well into next year by emphasizing its concern over weaker exports and the risks posed by Europe's debt woes. [ID:nN07106511]
"The Bank of Canada was clearly a catalyst initially to get the ball rolling on dollar/Canada bids but the market has been taking back dollar shorts pretty well all day long," said Jack Spitz, managing director of foreign exchange at National Bank Financial.
"Again, (the Bank of Canada was) focusing on the strength of the Canadian dollar, the impact on net exports, the sluggish U.S. economy," said David Watt, senior fixed income and currency strategist at RBC Capital Markets.
"So they didn't go out of their way to indicate they are uncomfortable on the sidelines."
Overnight, the currency had flirted with parity with the greenback, climbing to a high of C$1.0011 to the U.S. dollar, or 99.89 U.S. cents, as global equities and commodities rallied on the back of a U.S. tax deal and optimism that Ireland would pass an austerity budget, later detailed as the toughest on record.
However, North American equity markets failed to sustain the run-up in Europe and gold and copper prices backed off, partly due to investors taking profits on doubts the U.S. tax-cut extension would be pushed through and on uncertainty over a series of Irish budget votes this week.
Watt noted the Canadian currency was performing worse than its commodity-linked peers, such as the Australian dollar, going into the Bank of Canada announcement. It was trading instead in a way similar to safe-haven currencies such as the yen and Swiss franc, which were lagging.
"In the past, we've sort of indicated the Canadian dollar looks very much like a safe haven in a good way and today it looks like a safe haven in a bad way," he said.
The Canadian dollar CAD=D4 closed the North American session at C$1.0114 to the U.S. dollar, or 98.87 U.S. cents, down from Monday's close at C$1.0053 to the U.S. dollar, or 99.47 U.S. cents
Watt noted the Canadian dollar was still trading in a fairly tight range, with significant U.S. dollar support eyed around a November low of C$0.9977 and resistance at the 50-day moving average of C$1.0150.
Canadian bond prices were also down, tracking U.S. Treasuries in a steep selloff as investors moved out of the market. [US/]
However, Canadian bonds outperformed their U.S. counterparts across most of the curve with the cautious Bank of Canada statement capping the losses.
The two-year bond CA2YT=RR was down 13 Canadian cents to yield 1.629 percent, while the 10-year bond CA10YT=RR dropped 85 Canadian cents to yield 3.229 percent. (Editing by Peter Galloway)