By Frank Pingue
TORONTO, March 19 (Reuters) - The Canadian dollar reversed its overnight gain and fell versus the U.S. dollar on Wednesday as the calm restored in financial markets after Tuesday's U.S. Federal Reserve rate cut was short-lived.
Domestic bond prices, with no key Canadian data to trigger a move, followed the bigger U.S. Treasury market higher across the curve as equity markets looked poised for a pullback.
At 8:40 a.m. (1240 GMT), the Canadian dollar was at US$1.0032, valuing a U.S. dollar at 99.68 Canadian cents, down from US$1.0048, valuing a U.S. dollar at 99.52 Canadian cents, at Tuesday's close.
The Canadian dollar had rallied overnight, reaching a high of US$1.0126, or 98.76 Canadian cents per U.S. dollar, as the Fed rate cut on Tuesday helped boost market sentiment.
But the domestic currency's rally during the Asian session eventually fizzled as commodity prices fell and European stocks turned lower as the relief provided by the Fed rate cut became overshadowed by nagging concerns about the U.S. economy.
"The strong finish on North American equity markets spilled over into Asian markets and investors were willing to buy riskier assets, so cyclical and commodity-based currencies like the Canadian dollar benefited from that," said said Matthew Strauss, senior currency strategist at RBC Capital Markets.
"But less than 24 hours after the Fed cut, the underlying fear about the health of the financial sector is very much back in the market."
The Fed cut its federal funds rate by 75 basis points to 2.25 percent and the move helped fuel a rally in equity markets and restored some confidence in a market worried about the threat of a U.S. recession.
The Bank of Canada's key rate is 3.50 percent. A Reuters poll taken after the Fed decision showed a slim majority of the 10 Canadian primary securities dealers surveyed expect the bank to cut the rate by 50 basis points in April.
Also weighing on the commodity-linked Canadian dollar was a drop in oil prices from the record high reached earlier this week and a 2 percent slide in gold prices. Oil and gold are two key Canadian exports and often influence the direction of the nation's currency.
BONDS BOUNCE HIGHER
Canadian bond prices rose alongside the larger U.S. market as investors appeared set to take profits after Tuesday's stock market rally and pour their money into more secure assets like government debt.
"The tone in equity futures is weaker, likely due to profit taking," said Sal Guatieri, senior economist at BMO Capital Markets. "People realized that there still are underlying problems in the U.S. housing market and economy that will take some time to address."
Domestic data that showed wholesale trade rose 2.6 percent in January, more than twice the amount expected by analysts, did not trigger a pullback in bond prices.
The two-year bond was up 4 Canadian cents at C$102.95 to yield 2.451 percent. The 10-year bond increased 22 Canadian cents to C$104.24 to yield 3.456 percent.
The overnight Canadian Libor rate LIBOR01 was at 3.6833 percent, down from 3.7166 percent on Tuesday.
The yield spread between the two- and 10-year bonds was 100.4 basis points, down from 100.8 points at the previous close.
The 30-year bond rose 45 Canadian cents to C$117.65 to yield 3.973 percent. In the United States, the 30-year Treasury yielded 4.305 percent.
The three-month when-issued T-bill yielded 2.03 percent, down from 2.04 percent at the previous close. (Editing by Renato Andrade)