A drop in oil prices sparked a late-day rally on North American markets Tuesday and helped take investors minds off the outlook for interest rates.

The rally pushed U.S. markets up on the day, but wasn’t quite enough to force their Canadian counterparts back into black.

In Toronto, the S&P/TSX composite index finished the day down less than a point — 0.75 points or 0.01% to 8412, while the S&P/TSX venture exchange dipped 23.81 or 1.49% to 1571.25. Volume on the TSX was 204 million shares, while the venture exchange saw 44.4 million shares trade hands.

In New York, the Dow Jones industrial average gained 41.44 or 0.4% to 10432.52. Broader stock indicators were also up slightly. The Standard & Poor’s 500 index was up 1.7 or 0.15% to 1142.12, and the Nasdaq composite index was 2.91 or 0.14% to 2023.53.

U.S. markets got a boost from a drop in oil prices — the July crude oil contract fell US$1.51 to US$37.15 — and a U.S. Energy Department report suggesting crude oil prices could fall as low as US$36.20 in the third quarter of 2004. The monthly short-term energy outlook report said “the net effect of recently announced production increases by key OPEC producers is assumed to be an increase in third-quarter crude oil production,” likely about even with the expected second-quarter average of 28.5 million barrels per day.

For the most part, however, investors in the U.S. and Canada were preoccupied more by the outlook for interest rates than for oil prices.

Tuesday morning, the Bank of Canada said it was leaving interest rates unchanged. The central bank left its key overnight interest rate unchanged at 2% as had been widely expected, but left the door open for rate hikes later in the year, warning that overall inflation is being driven up by rising world oil prices. Economists now expect rates to begin to rise in the fall.

There was one other bit of good economic news as Canada Mortgage and Housing said housing starts in the first five months of this year were the strongest since 1987.

The Canadian dollar fell 0,14 to US74.17¢.

In the U.S., markets began the day by taking profits after strong gains on Monday. Their actions were exacerbated by a surprisingly forthright statement on interest rates from Federal Reserve Chairman Alan Greenspan that left open the possibility of faster-than-expected rate hikes. Speaking in London, Greenspan said the Fed was prepared to abandon a gradual, measured series of rate hikes in favor of larger increases should higher oil prices trigger a more general rise in inflation.

In Toronto, three of the TSX’s 13 sub-groups were up, including financials, which gained 0.68%. Bank of Nova Scotia was the most active of financial stocks, gaining 52¢ to $35.60. The biggest sector drop was gold stocks, which were off collectively 1.57%.

In other news, the S&P/TSX venture exchange said in a report that trading value for the year to May 30 was running 237% ahead of last year, while new equity financings were up almost 184% for the same period. The index itself was down 8% between Dec. 31 and May 30.