* Canadian dollar backs off seven-month high
* Ottawa forecasts bigger deficit but gives no specifics
* Bonds little changed with few factors influencing market
* Liquidity thin due to holidays in UK, U.S.
TORONTO, May 25 (Reuters) - The Canadian dollar eased
against the U.S. currency in thin trading on Monday, retreating
after a four-day climb to its highest level in seven months,
but it shrugged off Finance Minister Jim Flaherty's forecast of
a bigger federal deficit this year.
Late in the session, Flaherty said the deficit will be
"substantially more" than the C$33.7 billion that he forecast
in the government's January budget. [ID:nN25449361]
"We fully expected capitulation of this sort at the federal
level," said Eric Lascelles, chief economics and rates
strategist at TD Securities.
"At the time they were reasonable (forecasts), but fairly
quickly it became clear that the economy was turning down more
sharply than those initial estimates," he said.
The Canadian dollar finished at C$1.1235 to the U.S.
dollar, or 89.01 U.S. cents, down from C$1.1203 to the U.S.
dollar, or 89.26 U.S. cents, at Friday's close.
It reached as high at C$1.1194 to the U.S. dollar
overnight, but stayed in a 55-basis point range between
C$1.1224-C$1.1279 during North American hours as market
liquidity dropped with holiday market closures in the United
States and Britain.
"Markets are thin," said David Watt, senior currency
strategist at RBC Capital Markets. "Maybe the U.S. Treasury
auction this week will be the tipping point for sentiment on
the (U.S.) dollar and whether or not it makes a comeback or
just gets beaten up again."
Given ongoing concerns about ballooning U.S. debt levels,
markets await the U.S. Treasury's two-, five- and seven-year
debt auctions this week, which will total $101 billion -- an
important test of investor appetite for dollars and dollar
Part of the Canadian currency's 5-percent surge last week
was connected to market worries about the solidness of the AAA
credit ratings of the United States, which knocked the U.S.
Market players will have to wait until the end of the week
for any Canadian economic data, with the current account
balance for the first quarter on tap.
First-quarter GDP figures next Monday will likely be more
critical in helping the market gauge the pace of the economy's
recovery, just ahead of the Bank of Canada's next interest rate
announcement on June 4.
However, U.S. data this week may prove to be the driver
with a raft of housing data due, including new and existing
home sales statistics, with the focus on whether the U.S.
housing market is stabilizing.
Canadian bonds were mixed, without strong impetus to push
in either direction with U.S. Treasuries not trading because of
the Memorial Day holiday.
Flaherty's deficit comments made few waves in the bond
market, where prices were little changed throughout the
Canadian bonds may be more active later this week with the
upcoming Treasury auction and U.S. housing data.
The benchmark two-year government bond was unchanged at
C$100.19 to yield 1.154 percent, while the 10-year bond slipped
15 Canadian cents to C$103.95 to yield 3.284 percent.
The 30-year bond was off 5 Canadian cents at C$117.20 to
yield 3.977 percent.
(Editing by Peter Galloway)