October 2, 2008 / 2:17 PM / in 9 years

Canadian dollar drops, bonds surge on ECB comments

* Canadian dollar down about 4 percent so far this week

* Bonds gain on safe haven bid

* Focus on U.S. jobs data, U.S. House vote on bailout

TORONTO, Oct 2 (Reuters) - The Canadian dollar fell hard against the U.S. dollar on Thursday, with the greenback making swift gains on European Central Bank President Jean-Claude Trichet’s comments on risks to the euro zone economy.

Bond prices surged as worried investors continued to seek the safety of government debt amid a weakening global economy and falling stocks.

At 10:10 a.m. (1410 GMT), the Canadian dollar was at C$1.0719 to the U.S. dollar, or 93.29 cents, down from C$1.0620 to the U.S. dollar, or 94.16 U.S. cents, at Wednesday’s close.

“Most of the U.S. dollar strength overnight came as a result of more euro weakness heading into the ECB announcement,” said Shane Enright, currency strategist at CIBC World Markets.

“Most of the other currencies, the Canadian dollar included, are trending lower. With risk aversion still high and the markets still in crisis mode, the (U.S.) dollar is a beneficiary of that, even though on some levels, it seems a little nonsensical.”

The ECB kept its benchmark rate steady at 4.25 percent. Trichet said inflation risks in the euro zone have diminished, and that the central bank had discussed cutting rates, but had decided against it.

While the Canadian dollar has fallen about 4 percent so far this week, it has outperformed other major currencies against the U.S. dollar in the past quarter. Only the Japanese yen has fared better.

While it is “very hard to unilaterally strengthen” against the U.S. dollar in this volatile environment, the Canadian dollar’s fall won’t extend too far, Enright said.

BOND PRICES RALLY

Canadian bond prices were higher across the curve, reflecting a wait-and-see sentiment towards the U.S. House vote of the revived bailout package for the financial industry as well as recent figures that paint a picture of a deteriorating U.S. economy.

Prices have rallied this week as investors have parked their cash in the safety of government bonds in response to the huge swings in stock markets.

Canadian and U.S. stock markets opened lower on Thursday despite the U.S. Senate’s passage by a big margin of a bailout package for the financial industry.

The House of Representatives is expected to vote on the new bill on Friday after its surprise rejection of the first version of the plan earlier this week, which sent stocks reeling.

“Equity markets are unimpressed with the strong (Senate) majority and I think that’s just because the battleground is the House, so it still remains uncertain. Hopeful, but uncertain,” said Mark Chandler, fixed income strategist at RBC Capital Markets.

“As well, there’s increasing concern about the economic data in the U.S.”

Poor car sales, weak manufacturing numbers and disappointing jobless claims in the United Sates have heightened concern that there will be steep losses in Friday’s jobs figures for September.

Bond prices got an added lift when ECB President Trichet said the bank had considered cutting interest rates though it was a unanimous decision to keep rates on hold, Chandler said.

The two-year bond rose 14 Canadian cents to C$100.23 to yield 2.639 percent. The 10-year bond gained 37 Canadian cents to C$104.65 to yield 3.672 percent.

The yield spread between the two-year and the 10-year bond was 113 basis points, up from 105 basis points at the previous close.

The 30-year bond added 50 Canadian cents to C$114.00 for a yield of 4.159 percent. In the United States, the 30-year treasury yielded 4.176 percent.

The three-month when-issued T-bill yielded 1.75 percent, down from 1.85 percent at the previous close. (Reporting by John McCrank and Ka Yan Ng; Editing by Peter Galloway)

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