By John McCrank
TORONTO, Jan 9 (Reuters) - The Canadian dollar ended at a three-week low against a resurgent U.S. currency on Wednesday after a report showed Canadian housing starts for December missed market expectations by a wide margin.
Domestic bond prices, which had been rallying for weeks on fears of a U.S recession and the likelihood of interest rate cuts, fell as investors took profits.
The Canadian dollar closed at 99.03 U.S. cents, valuing a U.S. dollar at C$1.0098, down from 99.56 U.S. cents, or C$1.0044, at Tuesday's close.
Domestic housing starts fell 19.6 percent in December to a seasonally adjusted annualized rate of 187,500. That was down from an upwardly revised 233,300 starts in November, according to Canada Mortgage and Housing Corp.
Analysts polled by Reuters had expected 221,000 starts.
"With weather exerting a negative influence on building activity in December, the sharp drop in housing starts shouldn't be seen as the prelude to a U.S.-style meltdown in the coming year," Robert Hogue, a senior economist at BMO Capital Markets said in a note.
"Nonetheless, the sector's strong momentum of the last several years is expected to slow moderately as rising economic uncertainty throws some sand in the housing engine."
Even with December's sharp drop, CMHC said 2007 was the second strongest year for starts in almost two decades.
Another main factor weighing the Canadian dollar down was strength in the greenback, said Gareth Sylvester, senior currency strategist at HIFX Plc in San Francisco.
"It appears that we're seeing some U.S. dollar short positions being covered ahead of (U.S. Federal Reserve Chairman Ben) Bernanke's speech tomorrow."
Bernanke will be speaking on "Financial Markets, the Economic Outlook, and Monetary Policy."
Investors reversed bets against the U.S. dollar en masse on Wednesday as the market priced in aggressive interest rate cuts by the Fed to contain the U.S. economic slowdown.
"I think the market is really going to be waiting to get an indication as to the speed and direction of the monetary policy from the Fed before casting any other further judgment," said Sylvester.
The Fed has cut its benchmark rate by a full percentage point since September and many market players think another half percentage point cut may be on the table at the central bank's next meeting Jan. 29-30.
The Bank of Canada is expected to announce a 25 basis point cut to its overnight rate on Jan. 22.
Bond prices, which have made solid gains over the past couple of weeks due to fears of a U.S. recession, lost some ground as investors took profits.
U.S. economic concerns will continue to be the main drivers of the Canadian bond market for at least the near term, said Carlos Leitao, chief economist at Laurentian Bank
"Between now and next week, I think the key risk is going to be tomorrow's Bernanke speech and then, next week, it's the results of the American banks."
Many large U.S banks are set to report their fourth-quarter results next week, in what is expected to be one of the worst quarters in years due to the impact of the subprime mortgage meltdown and the resulting credit crunch.
"I think everybody is very nervously awaiting those financial results to see true state of American banks," said Leitao.
The two-year bond dropped 4 Canadian cents to C$101.36 to yield 3.495 percent. The 10-year bond fell 17 Canadian cents to C$101.03 to yield 3.868 percent.
The yield spread between the two-year and 10-year bond was 37.3 basis points, unchanged from the previous close.
The 30-year bond slid 31 Canadian cents to C$116.12 to yield 4.056 percent. In the United States, the 30-year treasury yielded 4.340 percent.
The three-month when-issued T-bill yielded 3.75 percent, down from 3.76 at the previous close.
(Editing by Rob Wilson)