By John McCrank
TORONTO, Feb 28 (Reuters) - The Canadian dollar climbed against the U.S. dollar on Thursday, mainly as a result of softness in the greenback, but also due to commodity prices which, while off recent highs, remain elevated.
Domestic bond prices, with no domestic data to influence direction, followed the larger U.S. Treasury market higher as data pointed to further weakness in the U.S. economy.
At 9:21 a.m. (1421 GMT), the Canadian dollar was at US$1.0219, valuing a U.S. dollar at 97.86 Canadian cents, up from US$1.0196, valuing a U.S. dollar at 98.07 Canadian cents, at Wednesday's close.
The Canadian dollar is up around 3 percent so far this week.
"The most important driver at the moment is broad-based U.S. dollar weakness," said Matthew Strauss, senior currency strategist at RBC Capital Markets.
The greenback has been hammered as of late due to the U.S. economic downturn and the expectation that the U.S. Federal Reserve will continue with its aggressive interest rate cutting campaign to promote domestic growth.
Fed Chairman Ben Bernanke told the House Financial Services Committee on Wednesday the Fed will "act in a timely manner as needed to support growth and to provide adequate insurance against downside risks".
U.S. dollar weakness will remain the primary driver of the Canadian dollar leading into key domestic data next week, said Strauss.
"In the very short term, we could see the Canadian dollar drifting a little bit higher, but I think the focus will start shifting more and more to the GDP data (for the fourth-quarter and for December) on Monday, and then more importantly, the Bank of Canada decision on Tuesday."
A Reuters poll taken earlier this month showed that the majority of Canada's primary security dealers are expecting the bank to cut its key lending rate by 50 basis points to 3.5 percent. But Strauss said a 50 basis-point cut is not a sure thing, and if it doesn't happen, the Canadian dollar could see more strength.
In the meantime, the commodity backdrop is also working in the Canadian dollar's favor. While off recent highs, oil is over $100, copper is above the $8000 mark and is gold trading north of $950.
Canada is a major producer of many key commodities.
Canadian bond prices rose along with the larger U.S. Treasury market after more signs of weakness in the U.S. economy fueled speculation of steeper Fed interest rate cuts.
Data showed a big jump in U.S. initial weekly jobless claims.
U.S. short term interest rate futures point to a 32 percent chance of a 75 basis point rate cut, to 2.25 percent, by the U.S. central bank. The Fed meets two weeks after the Bank of Canada makes it's monetary policy announcement on Tuesday.
Strauss said he expects the Fed to cut by 50 basis points at both of its next two meetings.
The Canadian economic calendar is set to pick up on Friday with the industrial product price and raw materials price indexes for January.
The overnight Canadian Libor rate LIBOR01 was 4.0833 percent, up from 4.0500 percent on Wednesday.
Wednesday's CORRA rate CORRA= was 3.9949 percent, down from 4.0012 percent on Tuesday. The Bank of Canada publishes the previous day's rate at around 9 a.m. daily.
The two-year bond rose 13 Canadian cents to C$102.15 to yield 2.975 percent. The 10-year bond gained 45 Canadian cents to C$101.85 to yield 3.760 percent.
The yield spread between the two- and 10-year bond was 78.5 basis points, down from 76.7 basis points at the previous close.
The 30-year bond added 70 Canadian cents to C$114.45 to yield 4.142 percent. In the United States, the 30-year Treasury yielded 4.556 percent.
The three-month when-issued T-bill yielded 3.20 percent, down from 3.21 percent at the previous close. (Editing by Renato Andrade)