TORONTO: The Canadian dollar was slightly lower against its US counterpart on Wednesday as worries about the sovereign debt crisis in Europe kept the currency from extending its strong gains of the previous session.
Risk sentiment took a blow as concerns about the financial health of Spain - Europe's fourth-largest economy - flared anew, sending the euro and other riskier currencies lower and boosting the safe-haven appeal of the US dollar.
The Canadian dollar was unable to strengthen further after the Bank of Canada's more hawkish outlook on Tuesday surprised the market and drove the Canadian dollar to its biggest one-day jump this year.
"When you reflect globally, you can see that there's cause for a more balanced assessment so that's kept the currency range bound," said David Tulk, chief Canada macro strategist at TD Securities.
Spain will auction up to 2.5 billion euros ($3.29 billion) of 2014 and 2022 bonds on Thursday. Any evidence of poor demand, and high yields, at the auction would aggravate concerns about Spain's fragile fiscal position. Data on Wednesday showed bad loans at Spanish banks rose to their highest level since 1994.
Commodity prices were also subdued, with oil and gold prices falling and copper remaining flat.
The Canadian dollar ended at C$0.9913 against the US dollar, or $1.0088, down slightly from Tuesday's North American close at C$0.9902 against the US dollar, or $1.0099.
In Wednesday's Monetary Policy Report (MPR), a quarterly report outlining the Bank of Canada's base-case projection for Canadian inflation and growth, the bank raised its growth forecasts for the first three quarters of 2012, but warned that Canadian household debt levels would rise further.
Bank Governor Mark Carney also said the euro zone debt crisis was "still the biggest downside risk" to the Canadian economy.
Still, the bank's more positive stance on Tuesday has prompted many of the country's primary dealers to pull forward their forecasts for an interest rate hike, according to a Reuters poll, with the central bank now expected to tighten policy early next year.
"The opinions diverge quite a lot," said Charles St-Arnaud, economist and currency strategist at Nomura Securities in New York. "With the door open now to a rate hike, if we have positive data in Canada and generally good data also globally they could go as soon as June or July, if needed."
Tulk saw a rate hike coming as early as September and expected the Bank of Canada to raise rates by as much as 50 basis points by the end of 2012. He forecast the bank's ta rget for the ove rnight lending rate - its main policy tool - would be at 2 percent by the end of 2013.
"In our view this lines up perfectly with a macro backdrop where we do have diminishing spare capacity and core inflation that we anticipate at, or slightly above, the Bank of Canada's 2-percent target," he said.
Canadian government bond prices were mostly higher. The two-year bond, which is especially sensitive to Bank of Canada interest rate moves, rose 1.5 Canadian cents to yield 1.326 percent. The benchmark 10-year bond climbed 20 Canadian cents to yield 2.046 percent.
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