* C$ firms to C$0.9860 to the U.S. dollar, or $1.0142
* Bonds prices stronger, but underperform Treasuries
* Markets price in at least one Canada rate cut by yr-end (Recasts with reaction after Fed statement)
TORONTO, Aug 9 (Reuters) - Canada’s dollar firmed against the U.S. currency on Tuesday in volatile trading after the U.S. Federal Reserve said it will keep its hefty monetary policy stimulus for at least another two years.
Canada's currency CAD=D4 rose to a session high of C$0.9860 to the U.S. dollar, or $1.0142, compared with Monday's North American session close at C$0.9909 to the U.S. dollar, or $1.0092.
Much earlier in the session on Tuesday it weakened to parity with the U.S. dollar for the first time since February.
“The market is extremely volatile. It indicates to me that a lot of people are unsure of what to do,” said John Curran, senior vice president at CanadianForex.
The Fed’s decision comes with financial markets in turmoil as worries escalate about heightened risks to the global economy after an embarrassing downgrade of U.S. debt. In addition, fears remain that European efforts to put a safety net under heavily indebted Italy and Spain may not suffice to avert wider credit market disruptions. [ID:nN1E7780FW]
In addition, three Fed officials voted against the move.
The swings were not limited to the currency markets. North American equity markets slid into negative territory, though Toronto’s main equity index bounced. [MKTS/GLOB]
In the Canadian overnight index swaps market, which trades based on expectations for the Bank of Canada's key policy rate, traders fully repriced the prospect of a rate cut later this year after backing off the idea when markets had been rallying early in the day. BOCWATCH
The possibility that the Fed will hold interest rates lower for longer may also mean the Bank of Canada will have to tread a similar path since the two economies are so closely linked.
But Canadian government bonds lagged the even stronger gains seen in Treasury prices. (Editing by Jeffrey Hodgson)
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