CANADA FX DEBT-C$ firms modestly as recent momentum holds

Reuters

* Canadian dollar at C$1.0963 or 91.22 U.S. cents * Loonie touches highest level in nearly 4 weeks * Bond prices mixed across the maturity curve By Leah Schnurr TORONTO, Feb 14 (Reuters) - The Canadian dollar strengthened slightly against the greenback on Friday, adding to a recent string of modest gains that has seen the loonie bounce back from last month's 4-1/2-year lows.

The loonie had a firmer tone after data overseas showed growth in the euro zone economy picked up more than analysts were expecting.

But at home, manufacturing sales unexpectedly dropped in December, helping the Canadian dollar to cut some of its early morning gains.

The Canadian dollar was at C$1.0963 to the greenback, or 91.22 U.S. cents, stronger than Thursday's close of C$1.0977, or 91.10 U.S. cents. The currency earlier hit a session high of C$1.0940, its highest level in nearly 4 weeks.

After a sharp sell-off in January, the Canadian dollar has managed to regain about 1.5 percent since the start of February as investors now view the speed of the decline in the currency at the start of the year to have been overdone.

"We went a long way in a very short period of time, so a bit of retracement here wouldn't be all that unexpected," said Benjamin Reitzes, senior economist at BMO Capital Markets in Toronto.

Still, the fundamentals that drove the loonie lower remain in place, particularly a Bank of Canada that is concerned about the weak inflation environment and is likely to keep rates low for some time. Most analysts expect there is more downside in store for the loonie.

"I would be surprised if it went that much further, there's probably a bit of room if we get some solid Canadian (economic) numbers," said Reitzes.

"We still think the medium-term trend over the next few months is a weaker Canadian dollar." Canadian government bond prices were mixed across the maturity curve, with the two-year up 1 Canadian cent to yield 1.014 percent and the benchmark 10-year down 4 Canadian cents to yield 2.466 percent.

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