March 25, 2008 / 12:43 AM / in 10 years

Dollar retreats after early rally

TORONTO (Reuters) - The Canadian dollar fell versus the U.S. dollar on Tuesday, after an early boost from a strong domestic retail sales report was wiped out by nagging concerns about exports to the United States.

Domestic bond prices rebounded from Monday’s selloff as dealers shrugged off the stronger-than-expected retail sales report and moved into secure assets like government debt.

At 9:30 a.m. (1330 GMT), the Canadian unit was at $1.0186 to the U.S. dollar, or 98.17 U.S. cents, down from $1.0179 to the U.S. dollar, or 98.24 U.S. cents, at Monday’s close.

Statistics Canada data earlier on Tuesday showed retail sales rose 1.5 percent in January, beating estimates for a 1.2 percent gain. That helped the Canadian dollar rise to $1.0140 to the U.S. dollar, or 98.62 U.S. cents, its highest level since March 20.

The gains were short-lived as investors locked in profits and turned their attention back to the health of the U.S. economy and what impact that may have on demand for Canada’s exports, the bulk of which end up south of the border.

That sent the Canadian dollar as low as $1.0217, or 97.88 U.S. cents, before it bounced backed slightly.

“I don’t think it changes the broader picture that domestic demand in Canada is still doing fine,” said Doug Porter, deputy chief economist at BMO Capital Markets. “But the big threat is to the export side and this really just drives on the point that domestic demand remains quite strong.”

The Canadian dollar was higher during the overnight session given the rise in gold prices, which helped the currency recoup some of the 3.6 percent drop it suffered last week when commodity prices backed off record highs.

Commodities make up about half of Canadian exports and that often leaves Canada’s currency vulnerable to changes in the prices for gold and oil.

Canada’s economic calendar is bare until the gross domestic product report for January, due on Monday. But the key piece of data due next week is the March jobs report on April 4.

BONDS FALL

Canadian bond prices added to earlier gains and remained higher across the curve as dealers moved back into the secure assets following a sell-off in the previous session.

Part of the move was attributed to a rally in the bigger U.S. Treasury market, which often influences the direction of bond prices in Canada.

“We are seeing a rebound in the (U.S.) Treasury market today and that’s probably compensating in Canada for the strong retail sales,” said Porter.

The overnight Canadian Libor rate was 3.6716 percent.

Monday’s CORRA rate was 3.4882 percent, up from 3.4437 on Friday. The Bank of Canada publishes the previous day’s rate at around 9 a.m. daily.

The two-year bond was up 4 Canadian cents at $102.51 to yield 2.706 percent. The 10-year bond increased 19 Canadian cents to $103.89 to yield 3.500 percent.

The yield spread between the two- and 10-year bonds was 79.4 basis points, up from 79.1 points at the previous close.

The 30-year bond was up 30 Canadian cents at $117.94 to yield 3.957 percent. In the United States, the 30-year treasury yielded 4.312 percent.

The three-month when-issued T-bill yielded 1.85 percent, up from 1.68 percent at the previous close.

Editing by Bernadette Baum

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