Oct. 24 (Bloomberg) -- Canada’s dollar dropped the most in a month over the past five days after comments from the central bank’s governor prompted investors to unwind bets policy makers would raise interest rates before the second half of 2010.

The Canadian currency posted its first weekly loss since Sept. 25 after climbing to within three cents of parity with its U.S. counterpart. Bank of Canada Governor Mark Carney, reiterating a warning that the nation’s dollar has grown too strong, said intervention “is always an option.” The Canadian economy grew in August, a report next week is likely to show.

“The Bank of Canada might actually end up having to postpone what we now expect will be the first hike in the third quarter of 2010,” Matthew Strauss, a senior currency strategist in Toronto at RBC Capital Markets Inc., said of interest rates. The firm is a unit of Canada’s biggest bank by assets. “They might have to postpone to the fourth quarter -- that’s what the market is worried about, and that is a real possibility.”

The currency, nicknamed the loonie for the aquatic bird on the C$1 coin, depreciated 1.6 percent to C$1.0538 per U.S. dollar yesterday in Toronto, from C$1.0370 on Oct. 16. It was the biggest drop since the 2.1 percent decline in the five days ended Sept. 25. One Canadian dollar buys 94.90 U.S. cents.

Carney is scheduled to discuss financial regulation when he addresses Quebec’s financial-markets authority in Montreal on Oct. 26. Statistics Canada is scheduled to report next week on industrial product prices and raw material prices, as well as gross domestic product. The government agency will say on Oct. 30 the economy expanded by 0.1 percent in August, according to the median forecast of 21 economists surveyed by Bloomberg News.

Bonds Mixed

Crude oil, the nation’s biggest export, and gold finished the week higher. Raw materials account for more than half of Canada’s export revenue.

Canadian government bonds were mixed, with the 10-year note’s yield up two basis points, or 0.02 percentage point, to 3.50 percent, from 3.48 percent on Oct. 16. The price of the 3.75 percent security maturing in June 2019 decreased 17 cents to C$102.03. The yield on the 1.25 percent note maturing in December 2011 fell 10 basis points to 1.52 percent.

Canada’s government debt lost investors 1.5 percent this year, according to a Merrill Lynch index.

After Australia unexpectedly raised interest rates on Oct. 6, becoming the first Group of 20 country to do so since the credit crisis began, speculation grew that Canada might be among the first nations to follow suit. The loonie appreciated to C$1.0207 nine days later, the strongest level since July 2008, the month that the currency last traded on a one-for-one basis with the U.S. dollar.

‘Suite’ of Tools

The Canadian currency, which strengthened 19 percent this year through Oct. 19, fell the most in four months the following day when the Bank of Canada left the key interest rate at a record low 0.25 percent and stepped up warnings the nation’s economic recovery was threatened by a stronger currency.

A more valuable Canadian dollar makes shipments of automobiles, lumber and metals to the U.S. less competitive and restrains inflation by making imports cheaper.

Carney said Oct. 22 that investors lost their “focus” on the central bank’s commitment to meet a 2 percent inflation target, promised to use a “suite of policy tools” to achieve the target and said currency intervention is an option. Central banks intervene by buying or selling currencies to influence exchange rates. Carney also reiterated the bank’s conditional commitment to leave interest rates on hold through June 2010.

Foreign-Investor Interest

“The initial reaction to Carney’s sterner words to the market certainly took out some dollar shorts or weaker long- Canada positions,” said Dean Popplewell, a currency analyst in Toronto at Oanda Corp., an online currency-trading firm. Short positions are bets a currency will fall, long positions that it will rise. “We could ease off to the C$106.50 level.”

Popplewell, who called himself a Canada-dollar bull, said dips in the currency are attracting interest from foreign investors. RBC’s Strauss predicted the loonie will trade at C$1.04 by year-end.

The yield on the overnight index swap due in nine months, based on predictions for the Bank of Canada’s rate at that time, dropped to 0.37 percent yesterday, from 0.41 percent on Oct. 19, indicating traders scaled back bets on interest-rate increases.

The difference, or spread, between the overnight index swap rate and the benchmark interest rate narrowed yesterday to 0.12 basis points. It closed at 0.1979 on Oct. 9, the widest since June 2008.

Crude oil for December delivery rose 2.5 percent to $80.50 a barrel this week on the New York Mercantile Exchange and touched a one-year high of $82 a barrel on Oct. 21. December gold futures advanced 0.5 percent to $1,056.40 an ounce, holding near a record high.

To contact the reporter on this story: Chris Fournier in Montreal at cfournier3@bloomberg.net

Last Updated: October 24, 2009 00:00 EDT