October 3, 2008 / 2:34 PM / 9 years ago

Canadian dollar falls, heads to one of worst weeks

4 Min Read

* Canadian dollar falls to lowest level in over a year

* Bonds slip as U.S. unemployment rate stable in September

* Focus on U.S. House vote on bailout

By John McCrank

TORONTO, Oct 3 (Reuters) - The Canadian dollar was heading toward its worst week in 38 years against the U.S. dollar on Friday as tight liquidity put a premium on the greenback and nervous investors awaited a vote in U.S. House of Representatives on a revised rescue plan for the financial sector.

Bond prices dipped as cautious optimism surrounded some U.S. employment data, which was worse than expected on the headline number, but not as bad as many feared on the unemployment rate.

At 10:14 a.m. (1414 GMT), the Canadian dollar was at C$1.0829 to the U.S. dollar, or 92.34 cents, down from C$1.0799 to the U.S. dollar, or 92.60 U.S. cents, at Thursday's close.

The currency is down 4.6 percent so far this week, its biggest weekly plunge since at least 1970, according to Thomson Reuters data. It is sitting at its weakest point since Aug. 16, 2007.

Delays in taking action on the proposed $700 billion bailout plan for the U.S. financial sector has caused a tightening in credit markets. That has put a bid to the U.S. dollar as lenders, worried about more big bank defaults and their cascading effects, hold on to their cash tightly.

The U.S. House of Representatives is expected to vote on revised version of the rescue package later on Friday after its surprise rejection of the first version of the plan earlier this week, which sent markets into panic mode.

"I think the general trends we've seen in place over the last couple weeks are likely to continue here and the market at this point is probably going to step back and wait for the results of the vote," said George Davis, chief technical strategist at RBC Capital Markets.

U.S. jobs data highlighted the impact of the current economic downturn, with the steepest job losses in 5-1/2 years in September as employers cut 159,000 nonfarm jobs from their payrolls. Analysts had expected a loss of 100,000 jobs.

However, the unemployment rate was unchanged and the market focused on that number and the greenback actually strengthened against a basket of currencies, including the Canadian dollar.

"Everybody's just shifted their focus back to politics and the House vote later today and I think we're likely to see the market probably consolidate a little bit, with the U.S. dollar trading with a slightly stronger bias," Davis said.

Weakening commodity prices, losing steam as the global economic outlook slides, were also hurting the Canadian dollar. Around half of Canadian exports are made up of natural resources.

Bond Prices Dip

Canadian bond prices fell as investors moved back into the riskier equity markets after seeing the print on the U.S. unemployment rate hold steady.

"We've seen a little bit of a selloff in the bond market, both in Canada and the U.S., simply because the U.S. payroll numbers, while worse than expected, could have been much worse," said Charmaine Buskas, senior economics strategist at TD Securities.

"In this environment, the market will latch on to anything remotely positive," she said.

The Bank of Canada moved to increase confidence in the Canadian markets by upping the amount it plans to inject into markets through Purchase and Resale Agreements (PRAs) to C$20 billion ($18.5 billion) from a previously announced $8 billion to improve liquidity in the financial system.

The two-year bond dipped 2 Canadian cents to C$100.30 to yield 2.605 percent. The 10-year bond slipped 10 Canadian cents to C$104.80 to yield 3.654 percent.

The yield spread between the two-year and the 10-year bond rose to 106 basis points, from 105 basis points at the previous close.

The 30-year bond fell 40 Canadian cents to C$113.90 for a yield of 4.164 percent. In the United States, the 30-year Treasury yielded 4.158 percent.

The three-month when-issued T-bill yielded 1.55 percent, down from 1.65 percent at the previous close. (Reporting by John McCrank; Editing by Peter Galloway)

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