CANADA FX DEBT-C$ drops to lowest in nearly a week after Poloz comments

Reuters

* Canadian dollar at C$C$1.1137 or 89.79 U.S. cents * Poloz warns about risk of prolonged sluggish growth * C$ holds around session lows after Flaherty resigns * Bond prices higher across the maturity curve By Leah Schnurr TORONTO, March 18 (Reuters) - The Canadian dollar weakened to its lowest level in nearly a week against the greenback on Tuesday after comments by Bank of Canada Governor Stephen Poloz reinforced the view that interest rates will remain low for some time.

The Canadian dollar showed little reaction following the announcement that Canada's finance minister, Jim Flaherty, has resigned, effective immediately. The currency held steady around session lows as analysts said the resignation was unlikely to change Canada's fiscal policy.

Market focus stayed on the comments made by Poloz, who warned about the risk of a prolonged period of sluggish growth and low interest rates. He also said it is unlikely that bad weather was entirely to blame for Canada's recent economic weakness.

The speech was viewed as slightly more dovish than expected and prompted the loonie to reverse course to trade lower. The currency picked up steam to the downside after Poloz said in response to a question that he could not rule out an interest rate cut.

Still, Poloz said the bank's stance is neutral and some analysts said the market's response was overdone.

"I would say it was interpreted as more dovish than it actually was," said Charles St-Arnaud, Canadian economist and currency strategist at Nomura Securities International in New York.

"A lot of investors have the view that the Canadian dollar should depreciate meaningfully this year, so some are looking for any reason to get that trade on." The Canadian dollar ended the North American session at C$1.1137 to the greenback, or 89.79 U.S. cents, weaker than Monday's close of C$1.1053, or 90.47 U.S. cents.

Monetary policy has been a major driver of the Canadian dollar in recent months after the central bank shifted gears last year by dropping any mention of interest rate hikes on the horizon.

In its most recent policy announcement in early March, the Bank of Canada continued to express concerns about weak inflation and repeated that its next move on interest rates could be in either direction.

The view that rates will remain low also weighed on yields for Canadian government bonds, said Hosen Marjaee, senior managing director of Canadian fixed income at Manulife Asset Management in Toronto.

"Our take is that rates are going to stay low for a long period. All of 2014 and maybe even a good portion of 2015," Marjaee said.

The loonie had been trading modestly firmer against the U.S. currency heading into Poloz's speech, boosted by data that showed Canadian factory sales climbed 1.5 percent in January, the fastest pace in nearly a year and well above expectations.

Investors were also keeping an eye on the latest developments out of Russia as Vladimir Putin signed a treaty making Crimea part of Russia, defying Western sanctions, but said he did not plan to seize any other regions of Ukraine.

Putin's comments soothed fears in the markets that tensions in Ukraine could escalate and had helped the Canadian dollar push higher early in the day.

Canadian government bond prices were higher across the maturity curve, with the two-year up 4 Canadian cents to yield 1.006 percent and the benchmark 10-year up 24 Canadian cents to yield 2.405 percent.

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