* Closes at C$1.0858 to the US$, or 92.09 U.S. cents
* Stumble in oil prices also weighs on C$
* Upbeat U.S. data lends support to greenback (Updates to session close)
By Frank Pingue
TORONTO, Aug 25 (Reuters) - The Canadian dollar closed lower on Tuesday as oil prices skidded from a 10-month peak while a Bank of Canada official warned that the currency's strength could hurt the nation's economic recovery.
The slide in the currency halted a five-day rally that extended into the early parts of Tuesday's session, when it reached its highest level in nearly three weeks.
But the momentum was short-lived and the selling picked up steam after Bank of Canada Deputy Governor Timothy Lane sounded a warning that persistent Canadian dollar strength was threat to the economic recovery. [ID:nN25220089]
After Lane's speech, the currency skidded as low as C$1.0870 to the U.S. dollar, or 91.99 U.S. cents, down from a session high of C$1.0718 to the U.S. dollar, or 93.30 U.S. cents, its highest point since Aug. 6.
"The market got a bit extended in the morning as equities opened up stronger, then it looked like the herd got caught the wrong way and everything turned around," said Steve Butler, director of foreign exchange trading at Scotia Capital.
"But I certainly do think the big news for Canada today was another warning shot from the Bank of Canada. I think that the market's got to be careful about doing too much to try and take them on because I think they have been pretty adamant about the fact that they are watching the currency closely," Butler said.
In his speech to economists, Lane said Canada's recession had most likely ended, with growth expected to resume in the third quarter. But he also said that a persistently strong Canadian dollar would reduce real growth and delay the return of inflation to target.
The Canadian dollar closed at C$1.0858 to the U.S. dollar, or 92.09 U.S. cents, down from C$1.0770 to the U.S. dollar, or 92.85 U.S. cents, at Monday's close.
The currency also came under pressure as oil prices staged a 3 percent fall after earlier hitting a 10-month peak [ID:nSP347579]. As a major energy producer and exporter, Canada often sees its currency influenced by oil price swings.
The early turnaround in the Canadian dollar followed data that showed larger than expected improvements in U.S. housing prices and consumer confidence, which lent new weight to signs the U.S. economy is emerging from its longest and deepest recession since the 1930s. [ID:nN25205751]
The upbeat data lent an immediate boost to the greenback, a departure from earlier this year when positive news opened the door to Canadian dollar gains as investors decided to sell safe-haven currencies like the U.S. dollar.
The greenback's ability to hold firm after a tendency by traders to sell it for higher-yielding currencies on the back of strong economic data reflected more normalized markets.
BOND PRICES EDGE HIGHER
Canadian bond prices, with no domestic economic data to consider, followed the bigger U.S. Treasury market to a higher close as decent demand there for an auction of two-year notes offset the impact of the upbeat U.S. data.
Bond prices had all been lower across the curve earlier in the session when the U.S. data sapped demand for more secure assets like government debt and prompted a move into riskier assets like stocks.
The two-year bond CA2YT=RR rose 6 Canadian cents to C$99.43 to yield 1.288 percent, while the 10-year bond CA10YT=RR rose 30 Canadian cents to C$102.90 to yield 3.398 percent.
The 30-year bond CA30YT=RR ended up 25 Canadian cents at C$118.55 to yield 3.900 percent.
Canadian bonds underperformed their U.S. counterparts across most of the curve. The Canadian 30-year bond was 32.1 basis points below the U.S. 30-year yield, versus 35.2 basis points on Monday. (Editing by Rob Wilson)