Canadian dollar touches 1-year low as oil skids
* Canadian dollar falls as much as 1 cent from Friday
* Steep drop in oil prices blamed for currency's retreat
* Bond prices rally ahead of Bank of Canada rate decision
By Frank Pingue
TORONTO, Sept 2 (Reuters) - The Canadian dollar fell to its lowest level against the greenback in more than a year on Tuesday, thanks to a slide in oil prices and a U.S. dollar that rallied against a number of major currencies.
Domestic bond prices, which were down early in the session, finished higher across the curve as dealers fled stocks in favor of more secure assets like government debt ahead of the Bank of Canada's interest rate announcement on Wednesday.
The Canadian dollar closed at C$1.0686 to the U.S. dollar, or 93.58 U.S. cents, down from C$1.0620 to the U.S. dollar, or 94.16 U.S. cents, at Friday's close.
The Bank of Canada did not provide an official close for the Canadian dollar on Monday due to the Labour Day holiday.
The currency retreated along with oil and gas prices on Tuesday after initial assessments showed that Hurricane Gustav had spared major U.S. production facilities in the Gulf of Mexico.
The aftermath of Gustav also allowed the market to focus more on slowing world energy demand and rising stockpiles, which are all negatives for the currency, because Canada is a key oil exporter.
During the overnight session the Canadian dollar dropped to C$1.0748 to the U.S. dollar, or 93.04 U.S. cents, its lowest level since mid-Augsut 2007.
But even as oil prices bounced off their lows, the currency did not follow along as the greenback rallied against a slew of currencies, given concerns about major economies outside the United States.
"We're sort of seeing that there is an underlying bid tone for the U.S. dollar because we are seeing the Canadian dollar did not make any headway, even though oil prices have come back," said David Watt, senior currency strategist at RBC Capital Markets.
According to Watt, hesitation ahead of key interest rate announcements from the Bank of Canada, European Central Bank and Bank of England this week was keeping currencies in those zones from making any headway versus the greenback.
Most Canadian primary securities dealers do not expect the Bank of Canada to alter its key overnight rate on Sept. 3, but most feel the next move it does make will likely be a cut.
"The Bank of Canada has surprised us before so you never quite know when they're going to let a knuckler go," said Watt. "So you don't want to get too settled in to think they they are going to do what you expect them to do."
BOND PRICES RALLY
Canadian bond prices finished higher across the curve but the move was limited as dealers remained hesitant on the first day of trading after a long weekend and ahead of Wednesday's Bank of Canada rate announcement.
While most dealers expect the Bank of Canada to leave its key interest rate steady at 3 percent through the end of the year, plenty of focus will rest on the statement that comes with the rate announcement for clues as to the timing of the central bank's next move.
Helping to give a boost to bond prices was a slide of more than 470 points on the Toronto Stock Exchange's main index, which was weighed down by retreating energy shares.
"People were neutral going into the long weekend and neutral coming out and they are not going to make any drastic moves until they see what the Bank of Canada says," said Sheldon Dong, fixed income analyst at TD Waterhouse Private Investment.
"The market doesn't expect the Bank of Canada to be cutting rates at all tomorrow and they will be much more interested about what it has to say about future rate cuts."
The two-year bond rose 9 Canadian cents to C$100.19 to yield 2.662 percent, while the 10-year rallied 44 Canadian cents to C$106.27 to yield 3.484 percent.
The yield spread between the two-year and 10-year bond was 85.9 basis points, unchanged from the previous close.
The 30-year bond increased 35 Canadian cents to C$117.05 for a yield of 3.996 percent. In the United States, the 30-year treasury yielded 4.356 percent.
The three-month when-issued T-bill yielded 2.43 percent, down from 2.44 percent at the previous close.
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