By John McCrank
TORONTO, Dec 11 (Reuters) - The Canadian dollar sagged against a firmer U.S. dollar on Tuesday after the U.S. Federal Reserve cut its bellwether interest rate by a quarter percent, which was less than some in the market had been anticipating.
Canadian bond prices, with no domestic data to influence moves, rallied along with the larger U.S. Treasury market as stock markets fell on the Fed's announcement.
The Canadian dollar closed at 98.58 U.S. cents, valuing a U.S. dollar at C$1.0144, down from Monday's session close of 99.41 U.S. cents, or C$1.0059.
"The market has rendered its verdict and it's given the Fed's modest rate cut a big thumbs down," said Doug Porter, deputy chief economist at BMO Capital Markets.
The Fed cut its key fed funds rate to 4.25 percent to help guide the U.S. economy through trouble in the global credit markets and the U.S. housing downturn.
The Fed also trimmed a quarter point off its discount rate, which it charges for direct loans to banks, to 4.75 percent.
But many market players had been calling for 50 basis point cuts to both the fed funds rate and the discount rate.
In general, when a country's interest rates come down, its currency is seen as less attractive. But since the Fed did not cut as deeply as some expected, the greenback was given a boost, which may turn out to be only temporary, Porter said.
"I think, in fact, what we might see some renewed concerns about the U.S. economy to come to the fore in the next couple of days and that might actually begin to undercut the U.S. dollar."
"The weakness in stocks may come back and undercut the U.S. dollar down the line."
Equities markets plunged after the Fed announcement, with Toronto stocks ending more than 200 points lower and the Dow Jones industrial average shedding nearly 300 points.
Key U.S. and Canadian interest rates are now at the same 4.25 percent level.
In its accompanying statement, the Fed did leave the door open for further cuts down the road.
Canadian bond prices rallied as investors fled the equities markets after the U.S. interest rate announcement.
"I think the bond market thinks the Fed has made a colossal mistake today," said Eric Lascelles, chief economics and rates specialist at TD Securities.
"That is, in underestimating the scope of the economic situation in such (a way) that the economy is presumed more likely to slow more drastically now and the market thinks the Fed is going to have to cut by more later to compensate for what is being viewed as a policy error today."
The two-year bond gained 24 Canadian cents to C$101.17 to yield 3.628 percent. The 10-year bond added C$1.06 to C$100.54 to yield 3.931 percent.
The yield spread between the two-year and 10-year bond moved to 30.3 basis points from 30.7 at the previous close.
The 30-year bond increased C$2.08 to C$115.51 to yield 4.089 percent. In the United States, the 30-year Treasury yielded 4.471 percent.
The three-month when-issued T-bill yielded 3.86 percent, down from 3.90 percent at the previous close.