October 3, 2008 / 8:51 PM / in 9 years

Canadian dollar has biggest weekly drop in decades

* Canada’s dollar ends week 4.5 pct lower versus greenback

* U.S. House passes $700 bln financial bailout package

* Bonds rise on concerns of global recession

By John McCrank

TORONTO, Oct 3 (Reuters) - The Canadian dollar suffered its biggest weekly decline in at least 38 years against the U.S. dollar this week as the passage by Congress of the $700 billion U.S. rescue package on Friday failed to persuade investors that the worst of the financial crisis was behind them.

Bond prices rose and yields fell as fears of a global recession had many in the market betting that central banks would soon be cutting interest rates to spur growth.

The Canadian dollar closed at C$1.0815 to the U.S. dollar, or 92.46 cents, down from C$1.0799 to the U.S. dollar, or 92.60 U.S. cents, at Thursday’s close.

The currency ended the week down 4.5 percent against the greenback, its biggest one-week drop since at least 1970, according to Thomson Reuters data. Early in the session it touched a 13-month low, but regained some ground after the passage of the rescue package for the besieged U.S. financial sector. See [ID:nSP58422]

The U.S. House of Representatives passed a revised version of the bailout plan after its surprise rejection of the first version of the plan earlier this week, which sent markets into panic mode.

As financial institutions in the United States and Europe have collapsed in response to bursting real estate bubbles and murky assets, lenders have responded by hoarding cash and U.S. dollars have become scarce, driving up the premium on them.

“You almost can’t look at a currency’s performance against the U.S. dollar because there is this underlying structural demand for dollars because of this financial crisis that is spreading around the world,” said David Watt, senior currency strategist at RBC Capital Markets.

Once the U.S. economic rescue package was passed, traders focused their attention back on world economies.

“We’re getting economic numbers in the U.S. which are dismal, and that, I think, removes any debate about whether there will be a recession in the U.S.... and there’s a significant risk of a global recession,” Watt said.

U.S. jobs data highlighted the impact of the 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.

The United States is by far Canada’s biggest trading partner.

Weakening commodity prices have also weighed heavily on Canada’s dollar, with around half of Canadian exports made up of natural resources.

”Commodity price measures are not just back to levels of a year ago, but all the way back to levels prevailing in late 2005, and the selloff is taking no prisoners,“ said Doug Porter, deputy chief economist at BMO Capital Markets. ”

“A darkening global growth outlook and a rejuvenated U.S. dollar -- which had its best week in years -- have both pounded on resource prices.”

BOND PRICES RALLY

Canadian bond prices rose as investors, with the U.S. bailout package passed, turned their attention back to the U.S. economy.

“The realization that the U.S. economy is in recession is beginning to settle in... package or no package, the recession is here,” said Carlos Leitao, chief economist at Laurentian Bank of Canada.

He said the market expects central banks, the U.S. Federal Reserve and the Bank of Canada included, will start cutting rates in the near term to try to spur growth. Bond yields, which move inversely to prices, fell to reflect those expectations of lower rates.

Early in the session, 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 to C$20 billion from a previously announced $8 billion to improve liquidity in the financial system.

The two-year bond rose 20 Canadian cents to C$100.52 to yield 2.500 percent. The 10-year bond gained 50 Canadian cents to C$105.40 to yield 3.582 percent.

The yield spread between the two-year and the 10-year bond rose to 115 basis points, from 105 basis points at the previous close.

The 30-year bond added 85 Canadian cents to C$115.15 for a yield of 4.095 percent. In the United States, the 30-year Treasury yielded 4.094 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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