TORONTO (Reuters) - The Canadian dollar closed lower against the US currency yesterday as investors stayed away from riskier assets after the Bank of Canada scraped talk of further rate hikes because of the turmoil in credit markets.

Domestic bond prices rallied as the market priced out the potential for a rate hike any time soon, while weak US data also offered support.

The Canadian dollar closed at C$1.0535 to the US dollar, or 94.92 US cents, down from C$1.0494 to the US dollar, or 95.29 US cents, at Tuesday's close.

The Bank of Canada did as expected and left its overnight rate steady at 4.50 percent, but the much-anticipated statement that accompanied its decision suggested it could stick to the sidelines as credit market turmoil tempers economic growth.

That marked a change from the previous statement issued in July when the central bank said there was a need for a "modest further increase" in the overnight rate.

Also weighing on the currency was political uncertainty following news on Tuesday that Prime Minister Stephen Harper will wait until October 16 to convene a new session of parliament, setting up a vote of confidence in the minority Conservative government, which could trigger an election.

"We got political uncertainty now and on top of that the Bank of Canada's clear statement that as the US goes so goes their thought process with regard to monetary policy going forward," said David Watt, senior currency strategist at RBC Capital Markets.

"Although we don't necessarily think the US economy is going to slow that dramatically, it is a risk that's out there, and so you just have some downside risks that are are becoming more prevalent for the Canadian dollar."

The majority of Canada's primary securities dealers now expect the Bank of Canada to leave interest rates unchanged for the rest of 2007, according to a Reuters poll taken after the central bank's latest rate decision.

Helping to cushion the Canadian dollar's fall was a rise in oil prices closer to $76 a barrel due largely to concerns that hurricane activity could crimp US inventories. Canada is a major producer and exporter of oil and the currency often follows the direction of oil prices.

The Canadian data calendar will pick up on Thursday with the arrival of July building permits and the Ivey Purchasing Managers Index for August. But the key report of the week will be the August jobs data on Friday.

Domestic bond prices managed to reclaim another chunk of last week's big sell-off as the Bank of Canada did away with talk of near-term interest rate hikes.

Also luring investors to the safety of bonds was another slide in North American equity markets and US data that showed weaker than expected employment and housing data.

The data supported a growing view that the US Federal Reserve will cut its fed funds target rate later this month. That helped boost the US treasury market and allowed the smaller domestic market to tag along.

The two-year bond rose 20 Canadian cents to C$99.23 to yield 4.213 percent, while the 10-year bond climbed 48 Canadian cents to C$97.29 to yield 4.344 percent.

The yield spread between the two-year and 10-year bond moved to 13.1 basis points from 6.8 at the previous close.

The 30-year bond gained 70 Canadian cents to C$110.41 to yield 4.370 percent. In the United States, the 30-year treasury yielded 4.770 percent.

The three-month when-issued T-bill yielded 4.12 percent, down from 4.10 percent at the previous close.