REFILE-CANADA FX DEBT-C$ rises on stock rally, Bank of Canada

Wed Sep 7, 2011 4:55pm EDT

(Refiles to insert dropped word in headline)

* C$ closes at C$0.9855 vs US$ or $1.0147

* Global stocks, commodities rally on German court ruling

* Bank of Canada dovish, but not to the extent expected

* Bonds prices fall across curve (Updates to close, adds comments, details)

By Andrea Hopkins

TORONTO, Sept 7 (Reuters) - The Canadian dollar ended higher on Wednesday, boosted by rallying commodities and stock markets and by a Bank of Canada statement that was not as dovish about interest rates as traders had expected.

World equity markets and commodities made strong gains, with oil up more than 3 percent, after a German court ruling supported the German government's bail-out efforts in the crisis-stricken euro zone [MKTS/GLOB]

The euro [EUR=] gained 0.6 percent versus the U.S. dollar, boosted by the German court ruling, and the dollar index [.DXY] fell 0.6 percent against a basket of major currencies.

"The euro is higher, it seems as though we had a rally in commodities, equities are all higher, so that's the reason the Canadian dollar is doing so much better," said David Bradley, director of foreign exchange trading at Scotia Capital.

"I think today is going to be the first day that we get a lower close than open (for the U.S. dollar), so I think people are maybe expecting the recent trend of dollar strength to reverse itself, in the short term anyway," he added.

The Canadian currency CAD=D4 ended the near the session high, at C$0.9855 versus the U.S. dollar, or $1.0147, up from Tuesday's North American close of C$0.9898 to the U.S. dollar, or $1.0103. It touched a session low of C$0.9912, or $1.0089, immediately after the Bank of Canada said it would leave interest rates unchanged but it strengthened through the day.

In a policy shift, Canada's central bank said there was less need to remove policy stimulus given slowing global economic momentum, but it also said that economic growth would resume in Canada in the second half of the year, with very stimulative credit conditions a factor. [ID:nN1E786055]

The bank held its key interest rate steady at 1 percent, as expected.

Analysts said that while the bank noted there is less need to raise rates than it had foreseen in July, it also did not hint at any need for a rate cut.

"This might not have been quite as dovish overall as some may have been expecting, given the fact that the market was actually priced for rate cuts at some point in the months ahead," said Doug Porter, deputy chief economist at BMO Capital Markets.

Higher interest rates tend to strengthen currencies by attracting international capital flows.

Higher energy prices, boosted by expectations of lower U.S. crude stocks, also underpinned commodity-linked currencies such as Canada's. Oil rose $3 to a five-week high, boosted by production outages in the Gulf of Mexico and the surge in equity markets. [O/R]

Canadian bond prices retreated across the yield curve.

The two-year bond CA2YT=RR, which is especially sensitive to Bank of Canada interest rate moves, was off 11.5 Canadian cents to yield 0.918 percent. It yielded 0.88 percent before the rate news.

The 10-year bond CA10YT=RR slipped 29 Canadian cents to yield 2.273 percent, up from 2.248 percent before the announcement. (Editing by Peter Galloway)

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