* C$ at 98.78 U.S. cents, steady after Spain downgrade
* Bonds prices down across the curve
* Bid-to-cover ratio of 2.083 on 10-yr bond auction (Recasts)
TORONTO, April 28 (Reuters) - The Canadian dollar held on to gains against the U.S. dollar on Wednesday, despite a downgrade to Spain's credit rating, propped up in part by steady commodity prices.
Debt downgrades for Greece and Portugal on Tuesday pulled the Canadian dollar 1-1/2 cents lower, its biggest one-day drop since January, as investors flocked to the safe-haven U.S. dollar.
But on Wednesday the Canadian currency's response to Standard & Poor's downgrade of Spain's credit rating by one notch to AA from AA-plus was cushioned by a slight gain in oil and commodity prices. [ID:nWNA9804] [O/R]
"Various commodities have managed to eke out gains. It's not just gold, but it's also oil and a few of the others so that's providing some support for the Canadian dollar," said Eric Lascelles, chief Canada macro strategist, at TD Securities.
At 1:50 p.m. (1750 GMT), the Canadian currency was at C$1.0124 to the U.S. dollar or 98.78 U.S. cents, up from C$1.0176 to the U.S. dollar, or 98.27 U.S. cents, at Tuesday's finish.
A rise in some U.S. stock indexes on Wednesday following a steep selloff on Tuesday also gave support for moves away from safe-haven instruments. [.N]
Currency markets remained focused on an interest rate decision by the U.S. Federal Reserve around 2:15 p.m. (1815 GMT). The Fed is expected to hold interest rates near zero and repeat its vow of an extended period of very low rates after its Federal Reserve Open Market Committee concludes a two-day policy meeting. [ID:nN2298630]
"The possibility that the Fed statement this afternoon, while signaling no change in policy rates, would potentially provide an upgrade to the economic assessment .... would, on balance, be better for Canada as well," said Jack Spitz, managing director of foreign exchange at National Bank Financial.
Canadian government bond prices tumbled across the curve on Wednesday, despite Europe's fiscal woes, alongside U.S. Treasuries.
U.S. Treasury debt prices fell as traders took profits after a rally early in the week and hedged bets before an imminent policy statement from the Federal Reserve. [US/]
Meanwhile, an auction of 10-year government bonds saw lower than expected demand.
The government of Canada's C$3 billion auction of 10-year bonds produced an average yield of 3.728 percent, up from 3.577 percent at the previous auction. <CA/GOVT1>
Bids from primary dealers totaled C$6.249 billion, resulting in a bid-to-cover ratio of 2.083, well below the previous auction. The ratio is a gauge of investor demand and a reading above 2 generally indicates a successful auction.
"It wasn't a resounding success that some expected. It's less to do with concern over Canadian bonds or generalized appetite, but it's more like a lot of bombs are going off right now," said TD's Lascelles, citing the Fed's interest rate announcement, a five-year U.S. Treasury note auction, and Europe's fiscal troubles.
"All of that excitement has encouraged to sit on their hands."
The two-year Canadian government bondfell 10 Canadian cents to C$99.16 to yield 1.969 percent, while the 10-year bond dropped 51 Canadian cents to C$100.55 to yield 3.678 percent. (Additional reporting by Claire Sibonney; editing by Peter Galloway)
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