By Jon Cook
TORONTO, April 19 (Reuters) - Canada's dollar slid against its U.S. counterpart for the second straight day on Thursday as soft U.S. data and euro zone worries hurt sentiment and threatened to reverse this week's gains driven by the Bank of Canada's more upbeat domestic forecast.
Data on Thursday raised doubts about the strength of the American economic recovery. New weekly U.S. claims for unemployment benefits were above expectations, factory activity in the Mid-Atlantic region slowed sharply and home resales dropped in March for a second straight month. "The data got things rolling as far as equities turning lower and the Canadian dollar starting to trade towards the top (of the range)," said David Bradley, a director of foreign exchange trading at Scotia Capital.
Concerns over European finances also clouded the outlook, as Spanish government bond yields rose after a debt auction and French yields rose on rumors, later denied, that the country's credit rating may be downgraded. The Canadian dollar ended at C$0.9952 against the U.S. dollar, or $1.0048, down from Wednesday's close at C$0.9913 against the U.S. dollar, or $1.0088. It touched a session low at C$0.9965.
The negative external forces ate into the Canadian dollar's gains from earlier in the week. The currency jumped after the Bank of Canada surprised the market with a more bullish economic forecast and signaled it was starting to think more seriously about tightening monetary policy. But a slightly more cautious tone in the central bank's Monetary Policy Report on Wednesday slowed the Canadian dollar's momentum, said Bradley.
"There was a lot of euphoria about the bank statement on Tuesday, but then the MPR was a little less hawkish," said Scotia's Bradley. "A lot of this is disappointment trade." While the Bank of Canada raised its growth forecasts for the first three quarters of 2012, a Reuters poll of 30 economists released on Thursday showed Canada's economy will lag the United States this year, predicting overall growth of 2.1 percent in 2012 compared to the bank's forecast of 2.4 percent. Still, the more hawkish central bank outlook has prompted several 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. John Curran, senior vice president at CanadianForex, said the bank's rosier outlook was interpreted "as a feather in Canada's cap" and sparked a flurry of Canadian dollar buying. But with so many investors being long on the currency there was bound to be "a filtering out of that trade." Curran saw the currency weakening further against the greenback, but added there should be good demand to buy the Canadian dollar as it gets closer to parity. He said it would likely remain in its range from the last few months, between C$0.9850 and C$1.0050.
Canadian government bond prices were mixed. The two-year bond edged down 1.5 Canadian cents to yield 1.331 percent. The benchmark 10-year bond was unchanged with a yield of 2.044 percent.
(Editing by Jeffrey Hodgson)
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