Canada’s dollar slipped the most in four weeks versus its U.S. counterpart as investors bet interest rates will remain on hold until late next year after the central bank said it will be careful about future rate boosts. The currency reversed last week’s gain as the Bank of Canada kept the benchmark overnight lending rate at 1 percent for a second consecutive meeting and underlined threats to the economic recovery from falling exports and Europe’s sovereign- debt crisis. Government bonds fell before a report next week that may show a decline in labor productivity slowed. Crude oil, the country’s largest export, dropped.

“It was notable that they acknowledged that the risks increased in the outlook, and talked about the external environment as well and the drag of less exports on growth,” Sacha Tihanyi, a currency strategist at Bank of Nova Scotia in Toronto, said of the central bank.

The Canadian currency weakened 0.5 percent to C$1.0091 per U.S. dollar yesterday in Toronto, from C$1.0039 on Dec. 3, when it touched C$1.0003, the strongest since Nov. 11. It was the biggest weekly drop since the currency fell 1.2 percent in the five days ended Nov. 12. One Canadian dollar purchases 99.10 U.S. cents.

Canada’s currency, nicknamed the loonie for the image of the aquatic bird on the C$1 coin, still rose for the week versus 10 of its 16 most-traded counterparts. It gained 0.9 percent to C$1.3350 per euro amid concern Europe’s sovereign-debt crisis will broaden, and rose 0.3 percent to 99.45 cents per Australian dollar on speculation that China will tighten monetary policy.

Third Quarter

Policy makers will hold Canada’s benchmark interest rate steady through the first half of 2011 and raise it to 1.5 percent in the third quarter, according to the median forecast in a Bloomberg survey of 23 economists and analysts.

The Bank of Canada said in a statement as its kept rates unchanged on Dec. 7 that the nation’s economy “appears slightly weaker” than expected in the second half of this year and exports “continued to exert a significant drag on growth.” The Canadian dollar’s 29 percent gain against the greenback since March 2009 was curbing orders for exporters.

Risks to Canada’s financial system have increased in the past six months because of Europe’s debt crisis, global trade imbalances and rising debt of local households, the central bank added in its twice-yearly Financial System Review on Dec. 9. Reduced investor confidence linked to indebted European governments could hurt Canada by making credit less available and more expensive, it said.

First Rate Boost

The bank also kept borrowing costs steady at its October meeting. It raised the key rate a quarter-percentage point at each of the three meetings before that, beginning on June 1, when it became the Group of Seven central bank to raise interest rates since July 2008.

The loonie has appreciated 3.7 percent this year in a measure of 10 developed-nation currencies, according to Bloomberg Correlation-Weighted Currency Indexes. The Australian dollar climbed 9.7 percent, while the greenback fell 1.1 percent and the euro tumbled 9.5 percent.

The Canadian currency has moved between C$1.0374 and 99.78 cents per U.S. dollar since Sept. 30. It traded on a one-for-one basis with the greenback on Oct. 14 and during the five days that began Nov. 5.

‘Continue to Hover’

“We still think the Canadian dollar will continue to hover around here and test parity; we don’t think the Canadian dollar is going to back up against the U.S. dollar until the new year,” said Blake Jespersen, director of foreign exchange in Toronto at Bank of Montreal. “We have lots of interested sellers between 1.0130 and 1.0150 and lots of interested buyers at 1.0050 on down to parity, but we’ve been trapped in this range.”

The loonie will trade at parity by the end of March and weaken to C$1.01 per dollar through the end of third-quarter 2011, according to the median average in a Bloomberg survey of 32 economists.

Crude oil, which accounts for 21 percent of the Bank of Canada’s Commodity Price Index, the largest single component, fell 1.6 percent this week amid concern moves by the People’s Bank of China to counter inflation will hurt demand for raw materials. Crude for January delivery traded at $87.79 a barrel in New York yesterday, from $89.19 a week earlier. It reached $90.76 a barrel Dec. 7, the highest level since October 2008.

China ordered lenders for the third time in five weeks to hold more money at the central bank after November lending and trade-surplus figures topped analysts’ estimates.

Government Bonds

Canadian government bonds fell, pushing up the benchmark 10-year note yield 12 basis points, or 0.12 percentage point, to 3.30 percent. It touched 3.32 percent, the highest level since June 22. The 3.5 percent security maturing in June 2020 ended the week down 96 cents to C$101.61.

Canada will sell C$3 billion ($3 billion) of two-year debt Dec. 15, according to a statement this week on the central bank’s website. The 1.75 percent notes are due in March 2013.

Labor productivity fell 0.1 percent in the third quarter, according to the median forecast in a Bloomberg survey before Statistics Canada reports the data Dec. 14. Productivity dropped 0.8 percent in the period from April to June. The measure is of worker output per hour. --With assistance from Chris Fournier in Montreal and Greg Quinn in Ottawa. Editors: Greg Storey, Dave Liedtka