* C$ rises as high as C$0.9492, or $1.0535
* Bank of Canada holds key interest rate at 1 pct
* BoC tone more hawkish, hints it will resume hiking
* Bonds drop on higher likelihood of rate hike soon
TORONTO, July 19 (Reuters) - The Canadian dollar powered to
its highest level against the U.S. dollar in 2-1/2 months on
Tuesday after the Bank of Canada held its key interest rate
steady, but hinted more firmly than before that it would resume
The central bank held its overnight rate at 1.0 percent,
but said core inflation will reach the bank's 2 percent target
earlier than expected as it sees Canadian economic growth
accelerating in the second half of 2011, in contrast to rising
risks abroad. [ID:nN1E76I045]
"There is a vague shift in the tone of the statement,
toward slightly more hawkish," said Camilla Sutton, chief
currency strategist, Scotia Capital. "So in terms of what the
market will price in, (the statement) will probably pull
forward their expectations for interest rate hikes ever so
Overnight index swaps, which trade based on expectations
for the key central bank policy rate, showed investors placing
a slightly higher bet on the likelihood of a rate hike later
this year. But the market still has not fully priced in a
25-basis-point hike until next year.
At 9:31 a.m. (1331 GMT), the currency
C$0.9494 to the U.S. dollar, or $1.0533, up from C$0.9551 to
the U.S. dollar just before the rate decision, and up from
Monday's North American session close of C$0.9589, or $1.0429.
It rose as high as C$0.9492, or $1.0535, its highest level
since May 3.
"The early response is that the markets are seeing (the
statement) as at least modestly more hawkish than expected,"
said Doug Porter, deputy chief economist at BMO Capital
The Bank of Canada will give a fuller view of its thinking
in its quarterly Monetary Policy Report on Wednesday.
The Canadian dollar also benefited from a market rebound on
Tuesday in risk assets after a selloff prompted by the debt
crises in Europe and the United States, and a weak economy in
the United States, Canada's biggest trading partner.
The European and U.S. problems have been seen as a threat
to economic growth in Canada, but the central bank maintained
its projection that the economy would return to full capacity
by the middle of 2012 and that inflation would remain well
Canadian government bond prices were lower across the
curve, reflecting the possibility that interest rate hikes may
come before year-end.
The two-year bond
, which is more sensitive to
Bank of Canada interest rate moves, was down 16 Canadian cents
to yield 1.468 percent, while the 10-year bond gave
back 39 Canadian cents to yield 2.918 percent.
(Additional reporting by Trish Nixon, Ka Yan Ng and Claire
Sibonney; editing by Peter Galloway)