* Bank of Canada raises rate, sees slower recovery
* C$ jumps to 96.40 U.S. cents
* Bonds fall as BoC statement more balanced than expected (Adds details)
By Ka Yan Ng
TORONTO, Sept 8 (Reuters) - The Canadian dollar finished nearly a penny higher against the U.S. currency on Wednesday after the Bank of Canada raised interest rates and kept open the possibility of further near-term rate hikes, while bonds fell sharply.
The Bank of Canada raised its key interest rate by 25 basis points for a third straight time this year, bringing the rate to 1 percent, but it cautioned that a weak U.S. economy would hamper Canada's recovery. For more see [ID:nN08241537] [ID:nN0898286].
Still, market analysts found the statement to be more balanced than expected, which lit a fire under the Canadian currency and sparked a selloff in bonds.
"The statement didn't shut any doors. They continue to monitor the data in these highly uncertain times. The language noted some high uncertainty and they also noted the extremely accommodative monetary conditions," said Sacha Tihanyi, currency strategist at Scotia Capital.
"It just goes to show that it's a very uncertain environment. The pace of rate increases is not obvious."
The Canadian dollar CAD=D4 finished at C$1.0374 to the U.S. dollar, or 96.40 U.S. cents, up from Tuesday's close of C$1.0480 to the U.S. dollar, or 95.42 U.S. cents.
The currency had jumped as high as 96.66 U.S. cents, but pared gains after the U.S. Federal Reserve's Beige Book report showed growth eased in the six weeks through the end of August, suggesting the recovery was faltering along the East Coast and in the Midwest. [ID:nWAL8KE6JM]
The two-year Canada bond CA2YT=RR dropped 29 Canadian cents to yield 1.418 percent, while the 10-year bond CA10YT=RR shed C$1.07 to yield 3.050 percent. Canadian bonds underperformed their U.S. counterparts across the curve.
The rate decision was one of the closer calls for the central bank in some time, and while market watchers said the bank's statement did not shut down the possibility of more rate hikes in the near term, market pricing on Wednesday favored no change in rates.
According to a Reuters calculation on yields on overnight index swaps, the probability of the bank leaving rates unchanged at its next policy announcement date in October faded to about 68 percent at the end of Wednesday's session from around 90 percent, right after the rate decision. BOCWATCH
The pricing is in line with a Reuters poll of Canada's 12 primary dealers after the rate announcement, which showed most sticking to previous forecasts that the central bank will leave interest rates steady for the rest of the year after a September hike. Some of the respondents said their forecasts were under review. [CA/POLL]
"Granted, there's a possibility of a hike still over the next several decisions but I don't see any conviction from the bank quite yet," said Eric Lascelles, chief macro strategist at TD Securities.
He noted that Bank of Canada Governor Mark Carney has several speaking engagements in the next month and that he will closely parse the bank chief's comments as well as monitor the incoming data.
This Friday, Carney will be participating in the Spruce Meadows Changing Fortunes Round Table in Alberta. His comments will follow Canada's August figures for employment. They are expected to show the economy added 30,000 jobs in the month. [ID:nN03113893]
The currency held gains after data showed purchasing activity in the Canadian economy jumped much more than expected in August. [ID:nN08101283] (Editing by Peter Galloway)
