The Canadian dollar fell against a broadly firmer US currency on Friday ahead of crucial fourth-quarter economic growth numbers, the last major data before the Bank of Canada sets policy next week.
Bonds posted mild gains.
At 7:45 am, the Canadian dollar was at C$1.3477 to the US dollar, or 74.20 US cents, down from C$1.3422 to the US dollar, or 74.50 US cents, at Thursday's close.
The GDP report, due at 8:30 am, is seen notching up annualised growth at 3.1 percent. "We think GDP numbers will be on the strong side, but we're continuing to see a broad-based rebound in the US dollar," said Monica Fan, currency strategist at RBC Capital Markets.
The US dollar has climbed against most major currencies in the latter half of this week, gathering momentum from heightened concerns that the European Central Bank may cut interest rates next week if there is evidence that euro strength is putting downward pressure on inflation.
But the Canadian dollar's drop in recent sessions has also been attributed to mounting speculation that the Bank of Canada will have to continue cutting interest rates after March. Most are convinced of a 25 basis point rate cut on March 2.
"The Canadian dollar weakness is being compounded by expectations that interest rates will be cut next week and there's a 50/50 percent chance that rates will fall even further on April 13," said Fan, noting the Bank of Canada's accompanying statement to its policy decision next Tuesday will be "all-important" in determining the market's outlook.
In the previous session, the Canadian dollar fell hard, but recovered from session lows after a disappointing read on Canadian retail sales. The report firmed expectations that the Bank of Canada will cut interest rates next week, and some analysts said the data will be a drag on the GDP number.
Bank of Canada David Dodge said last week that Canadian economic growth may be slightly weaker than expected in the final quarter of last year, but maintained the central bank's view of 2004 remained "essentially valid."
Last month's update on Canada's economy slashed the 2004 growth forecast by half a percentage point to 2.75 percent and made clear the bank was ready to cut rates if the high Canadian dollar was seen to be damaging the economy too much.