* C$ closes lower at 86.77 U.S. cents
* U.S. Fed holds policy steady, less worried on deflation
* Bond prices fall, mirror losses in U.S. market (Updates figures, adds details)
TORONTO, June 24 (Reuters) - The Canadian dollar weakened on Wednesday after the U.S. Federal Reserve said it would keep interest rates unchanged and removed a reference about its concern that inflation could run below desired levels.
Concluding a two-day meeting, the U.S. central bank said it had decided to hold overnight interest rates in a zero to 0.25 percent range -- the level reached in December -- and repeated they would likely stay unusually low for some time. [ID:nTRT000372]
“They removed a key reference to the risk that inflation could persist for a time below rates that foster economic growth. They seem to have removed that so obviously they think that tail risk has lessened,” said Michael Gregory, senior economist at BMO Capital Markets.
The Canadian dollar finished at C$1.1525 to the U.S. dollar, or 86.77 U.S. cents, down from C$1.1500 to the U.S. dollar, or 86.96 U.S. cents, at Tuesday’s close.
The U.S. dollar rose against major currencies, including the Canadian dollar. It fell more than half a U.S. cent to as low as C$1.1560 to the U.S. dollar, or 86.51 U.S. cents, shortly after the Fed’s statement, before recovering.
“There was that risk out there that the Fed could start to increase its monetization of government debt, which is never a good thing for a currency. That risk has lessened a little bit so it has provided support for the U.S. dollar at the expense of the Canadian dollar and other currencies,” said Gregory.
The Fed repeated it will evaluate the timing and size of purchases of securities in light of the evolving outlook. [ID:nN24478373]
Earlier in the session, the Canadian dollar had rallied as high as C$1.1418, or 87.58 U.S. cents, on improved global sentiment when the Organisation for Economic Co-operation and Development said in its latest economic outlook that the slowdown in its 30 member countries was close to the bottom. [ID:nLN270829]
Canadian bond prices were lower across the curve, in line with their U.S. counterparts, following the Fed announcement. Some U.S. bond investors were disappointed the central bank did not extend programs for buying longer-dated treasuries and mortgage-backed securities.
“I don’t know if people were disappointed with that but certainly that was our expectation, that there wouldn’t be any changes at this meeting,” said Sheldon Dong, a fixed income analyst at TD Waterhouse Private Investment.
“It basically met expectations; there were no surprises.”
The benchmark two-year government bond dipped 6 Canadian cents to C$99.96 to yield 1.271 percent, while the 10-year bond fell 42 Canadian cents to C$102.35 to yield 3.468 percent.
The 30-year bond was off 75 Canadian cents at C$118.25 to yield 3.919 percent. The comparable U.S. issue yielded 4.451 percent.
Canadian bonds outperformed U.S. treasuries across the curve. The Canadian 30-year bond was 53.2 basis points below the U.S. 30-year yield, unchanged from Tuesday. (Reporting by Ka Yan Ng; editing by Rob Wilson)