December 4, 2008 / 10:14 PM / in 9 years

CANADA FX DEBT-Canadian dollar plunges on oil, politics

* Canadian dollar drops 1.9 percent

* Oil prices plunge, political uncertainty grows

* Bonds rise after central banks rate cuts

By Cameron French

TORONTO, Dec 4 (Reuters) - The Canadian dollar fell for the seventh-straight day versus the U.S. dollar on Thursday, dropping nearly 2 percent on the back of a sharp drop in oil prices and political uncertainty in Canada.

Bond prices leaped on aggressive interest rate cuts by overseas central banks, and worries about recession, which stoked the safe-haven appeal of government debt.

The currency ended the session at C$1.2781 to the U.S. dollar, or 78.24 U.S. cents, down from C$1.2535 to the U.S. dollar, or 79.78 U.S. cents, at Wednesday’s close.

Canadian Prime Minister Stephen Harper persuaded the country’s governor general on Thursday to suspend Parliament so he could avoid being ousted by opposition parties next week.

The move means a struggle between the government and the opposition for power will continue well into January. Analysts said the ongoing drama has raised concerns about the country’s ability to deal with the economic crisis.

However, the main drag on the currency was crude oil prices that dropped more than 6 percent to under $44 a barrel on worries about falling demand. The commodity hit its lowest level in nearly four years.

The Canadian dollar has tracked crude prices closely over the last few years due to Canada’s big oil exports, and as higher oil prices have drawn billions of dollars in investments to Canada’s oil sands. The retreat in oil prices has since caused projects to be canceled or delayed.

“We’re heading very close to $40 a barrel. Much below $40 and the outlook for crude is going to look pretty weak from a technical point of view,” said Shaun Osborne, chief currency strategist at TD Securities in Toronto.

For the day, the currency traded in a wide range of 78.08 U.S. cents to 79.94 U.S. cents.

The Canadian dollar’s drop against the euro and yen was even steeper, as a bold rate cut by the European Central Bank won favor from investors, while the Japanese currency benefited from investors’ unwinding risky positions in other currencies.

BONDS CLIMB

Bond prices rose on aggressive interest rate cuts by overseas banks and on safe-haven buying as dealers worried about a possible global recession and pulled money from equity markets.

The European Central Bank cut its interest rate by a record 75 basis point to 2.50 percent on Thursday, while the Bank of England chopped 100 basis points. Those cuts followed Sweden’s record 175 basis point cut, and New Zealand’s 150 basis point reduction.

“It’s the credit crunch, fears of a deepening recession, fears of deflation, just extreme risk aversion. And equity markets are getting hammered again,” said Sal Guatieri, senior economist at BMO Capital Markets.

Yields of two-year, 10-year, and 30-year bonds are at their lowest yields in more than a decade.

Market players were also preparing for the Canadian employment data for November on Friday, which is the last piece of major data before the Bank of Canada makes its next interest rate announcement on Dec. 9. U.S. employment figures, due Friday, could also influence Canadian debt markets.

The two-year bond rose 14 Canadian cents to C$102.38 to yield 1.528 percent. The 10-year bond gained 90 Canadian cents to C$109.85 to yield 3.046 percent.

The yield spread between the two-year and 10-year bond was 158 basis points, up from 157 at the previous close.

The 30-year bond advanced 90 Canadian cents to C$121.80 to yield 3.748 percent. In the United States, the 30-year Treasury yielded 3.068 percent. (Reporting by Cameron French; editing by Peter Galloway)

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