TORONTO (Reuters) - The Canadian dollar marched higher against a broadly softer U.S. currency on Monday in reaction to a new spate of violence in the Middle East including a car bomb in Baghdad that killed the head of Iraq's U.S.-appointed Governing Council.
Canadian bonds also rose on the news in a safe haven bid.
At 9:25 a.m., the Canadian dollar was at C$1.3799 to the U.S. dollar, or 72.47 U.S. cents, up from C$1.3902 to the U.S. dollar, or 71.93 U.S. cents, at Friday's close.
"The Canadian dollar has rallied significantly in the overnight, more or less, on geopolitical issues, and will wash some of those long dollar positions on stops," said Jack Spitz, director of foreign exchange at National Bank of Canada.
"That could set the tone for a further rally in the Canadian dollar to C$1.3698."
The Canadian dollar began its rally overnight, hitting a high of C$1.3745, before giving up some of its gains. The currency had not yet matched the overnight high in early dealings in the North American session.
The killing in Baghdad followed several bomb blasts in Turkey on Sunday, just hours before British Prime Minister Tony Blair was due to arrive in the country.
A report that showed factories in New York State saw business conditions ease a little in May after surging the previous month, put further pressure on the U.S. dollar.
The Federal Reserve Bank of New York said the business conditions index of its two-year-old Empire Manufacturing Survey slipped to 30.2 in May, from a revised 34.0 in April.
There were no Canadian economic releases of note set for Monday. There is very little on the economic docket for Canada this week except for Thursday's release of the consumer price index for April.
In the previous session, the Canadian dollar eked out a small gain, rebounding from 8-1/2-month lows, as divergent economic data prompted traders to bid the currency up.
With a U.S. interest rate hike expected in June, and a Bank of Canada increase seen not long after, the market has been scouring economic data, looking for signs of strength or weakness that might prompt central bank action.
BONDS RISE IN SAFTEY BID
The latest round of bombings put a flight-to-safety tone on Canadian bonds on Monday, lifting prices from a recent tumble.
Bonds have been tumbling since late March as strong economic data have forced the market to begin pricing in imminent interest rate increases.
The two-year bond rose 5 Canadian cents to C$99.96 to yield 3.019 percent, while the 10-year bond rose 15 Canadian cents to C$103.05 to yield 4.828 percent.
The yield spread between the two-year and 10-year bond moved to 179.5 basis points from 180.5 basis points in the previous session.
The 30-year bond, due 2029, rose 18 Canadian cents to C$105.08 to yield 5.378 percent. In the United States, the 30-year treasury yielded 5.481 percent.
The three-month when-issued T-bill yielded 2 percent,
unchanged from the previous close.
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