TORONTO (Reuters) - The Canadian dollar gave back some of its recent gains against a firmer U.S. dollar on Tuesday, after rising 3.4 percent versus its U.S. counterpart over the previous three sessions on uncertainty surrounding the bailout of the U.S. financial sector.
Canadian bond prices fell after data showed that core inflation rose more than expected in August, reinforcing the idea that the Bank of Canada will not be lowering interest rates any time soon.
The Canadian dollar fell 0.3 percent to end the North American session at C$1.0363 to the U.S. dollar, or 96.50 U.S. cents. That was down from C$1.0334 to the U.S. dollar, or 96.77 U.S. cents, at Monday’s close.
“After the recent selloff, the U.S. dollar is finding some stability,” said Matthew Strauss, senior currency strategist at RBC Capital Markets.
Investors had been selling U.S. dollars over concerns about how Washington was going to finance its planned $700 billion bailout for the U.S. financial sector.
U.S. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke warned members of the Senate banking committee of dire consequences for financial markets if the bailout package were delayed, although they gave few concrete details.
“The market is waiting on more detail on the bailout package, so we could end up in a situation where we see another relatively stable day tomorrow, or if some of the details start leaking to the market, it could give direction to the U.S. dollar and, by extension, (U.S.) dollar-Canada,” said Strauss.
Canadian bond prices fell, lagging the moves of the larger U.S. Treasury market, as data showed that inflation rose more than expected in August.
“It cast a little bit of doubt on the sunny view that Canadian inflation was poised to roll over and present no problem whatsoever, leaving the door open for the Bank of Canada to cut rates if they saw the need,” said Doug Porter, deputy chief economist at BMO Capital Markets.
The inflation rate rose to 3.5 percent on the year from 3.4 percent in July, its highest level since March 2003, as energy prices remained sharply above 2007 levels.
Core inflation, which excludes volatile items like gasoline prices, rose more than expected at 0.3 percent in the month and 1.7 percent year-over-year.
Analysts had expected a monthly rise of 0.1 percent and an annual rate of 1.6 percent, according to median forecasts in a Reuters poll.
The two-year bond slipped 8 Canadian cents to C$99.71 to yield 2.887 percent, while the 10-year bond fell 15 Canadian cents to C$104.55 to yield 3.686 percent.
The yield spread between the two- and 10-year bond was 78.8 basis points, up from 84.2 basis points at the previous close.
The 30-year bond fell 20 Canadian cents to C$114.70 for a yield of 4.121 percent. In the United States, the 30-year treasury yielded 4.424 percent.
The three-month when-issued T-bill yielded 2.20 percent, down from 2.27 percent at the previous close.
Reporting by John McCrank; editing by Rob Wilson