TORONTO (Reuters) - The Canadian dollar was slightly weaker against its U.S. counterpart in early trade on Tuesday as worries over Europe continued to weigh, but strength in global equities was expected to buoy the Canadian currency.
Negative reaction to Standard & Poor's downgrading of Italian debt was short-lived on financial markets, with European shares up strongly and Wall Street for a solid start. The euro also recovered from earlier losses.
Investors took some comfort in struggling Greece paying a coupon on its debt and reports that the European Central Bank had been buying Italian debt.
"What appears to be the biggest influential factor in terms of the rise of the euro and the rise in European equities this morning is talk that Greece has been able to meet their 750 million coupon payment that was today," said Jack Spitz, managing director of foreign exchange at National Bank Financial.
The renewed appetite and bargain hunting in equities is likely to pull investors from safe havens like the U.S. dollar, which bodes well for a stronger Canadian dollar later in the session, Spitz said.
"There is a temporary disconnect between currency valuations and what is happening ultimately with equities posting gains. The U.S. dollar should be weaker across the board but we're not seeing that quite yet."
At 8:04 a.m., the Canadian dollar stood at C$0.9902 to the U.S. dollar, or $1.0010 U.S. cents, down slightly from Monday's North American session close of C$0.9897 to the U.S. dollar, or $1.0104 U.S. cents.
Spitz said the market is expecting a dovish tone from Bank of Governor Mark Carney when he speaks in New Brunswick at 11:45 EDT in an address to the Saint John Board of Trade on the economic outlook.
"He'll be dovish. He's already changed his position from hawkish to neutral and the next logical progression provided that the global economy continues to be challenged is he will go dovish. Is a rate cut on horizon? According to the futures market, perhaps by the end of the year, but that could still be scaled back," Spitz said.
"The real issue for Carney will be the strength in the Canadian dollar and what kind of a headwind that is for economic growth in this country."
He noted intraday resistance levels for the Canadian dollar at C$0.9940, in line with highs in Europe and London overnight, and light support at C$0.9865.
Bond prices were lower across the curve.
The two-year bond was down 2 Canadian cents to yield 0.944 percent, while the 10-year bond was down 20 Canadian cents to yield 2.207 percent.
