* C$ jumps after Canadian rate cut, but down from Monday
* BoC cuts rates 50 bps to 1.0 percent, as expected
* Government bonds follow U.S. Treasuries lower (Adds details, quote)
By Jennifer Kwan
TORONTO, Jan 20 (Reuters) - The Canadian dollar fell versus the U.S. currency on Tuesday morning as the greenback rallied against a range of currencies, but recovered some losses after the Bank of Canada cut its key overnight lending rate to a 50-year low.
The U.S. dollar hit its strongest level against a currency basket since early December, with some traders crediting euphoria ahead of Barack Obama’s inauguration as U.S. president for increasing short-term demand for the U.S. currency.
At 11:04 a.m. (1604 GMT), the Canadian currency was at C$1.2608 to the U.S. dollar, or 79.31 U.S. cents.
This was up from C$1.2675, or 78.90 U.S. cents shortly before the rate announcement, but still down from C$1.2547 to the U.S. dollar, or 79.70 U.S. cents, on Monday.
The currency may have firmed after the rate decision because a few market players were betting on a larger cut by the central bank, said Michael Gregory, senior economist BMO Capital Markets.
“There was a little, perhaps, disappointment by the market that there wasn’t more of an aggressive move, which of course provides a little support for the Canadian dollar because spreads aren’t as narrow as they otherwise would have been,” he said.
A Reuters poll released late last week predicted the Bank of Canada would cut rates by at least 50 basis points, though one dealer had forecast a cut of 75 basis points.
The Bank of Canada cut its key interest rate to 1 percent, and predicted a period of falling prices this year as a recession takes hold. It signaled that further cuts may be on the horizon, but said it would judge carefully “to what extent further monetary stimulus will be required”.
Going forward, the market will likely expect more cuts, said Gregory.
“At this stage, given the economic numbers in Canada are going to be pretty dismal, pretty ugly over the next few months, the market is definitely pricing in odds of at least a 25 basis point move, perhaps a little more than that,” he said.
On the economic front, the unit was also pressured by manufacturing data on Tuesday that showed the value of Canadian manufacturing shipments plunged by a record 6.4 percent in November from October. [ID:nN20]
Canadian government bond prices were largely lower, following U.S. Treasuries, which sank on supply concerns.
As well, lower bond prices could reflect the disappointment of some market players who were expecting a bigger cut, said Sheldon Dong, fixed income analyst at TD Waterhouse Private Investment.
The two-year bond was down 12 Canadian cents lower to C$103.19 to yield 1.015 percent, while the 10-year bond dropped 68 Canadian cents to C$112.75 to yield 2.698 percent.
The 30-year bond fell C$1.30 to yield 3.607 percent. In the United States, the 30-year treasury yielded 3.0545 percent. (Editing by Jeffrey Hodgson)