TORONTO (Reuters) - The Canadian dollar shed more than a cent against the U.S. dollar on Tuesday, due in part to a stronger greenback and a negative view on world economic growth stemming from a rough start in the equities markets.
Domestic bond prices were higher on a flight to safety bid in response to the softer equity markets.
At 9:40 a.m. ET, the Canadian dollar was at 99.54 U.S. cents, valuing a U.S. dollar at C$1.0046, down from US$1.0067 to the U.S. dollar, or 99.33 Canadian cents, at Friday's close.
"Canada had a bit of a rocky night along with most currencies against the U.S. dollar, which had a pretty significant move," said Steve Butler, director of foreign exchange at Scotia Capital.
The strength in the greenback comes as investors take the view that the recent aggressive moves by the U.S. Federal Reserve will help prevent the U.S. economy from slipping into recession.
The Fed has cut its key lending rate by 225 basis points, to 3 percent, since September and the market is pricing in at least another 75 basis points of easing by the end of the year.
In that time, the Bank of Canada has cut its key lending rate by 50 basis points, to 4 percent, opening up a 1 percent interest rate differential. That initially gave the currency some strength, but has left it largely range bound.
"I don't think the market is too sure of what to do with the Canadian dollar yet," said Butler.
"There are still some significant risks of the U.S. slowdown spilling over into the Canadian economy, but until we really see the data pointing to that direction, I think with the interest rate differential, Canada is going to hold on for a little while."
Turbulent equities markets have been largely dictating the daily moves of the Canadian dollar in the past couple weeks.
Equities markets are being looked to as a barometer for the health of the global economy. A global economic downturn would crimp demand for the commodities that Canada exports.
North American equities markets looked set for losses after data showed an unexpectedly large contraction in the U.S. services sector in January, heightening market jitters. The data also caused the greenback to pare some of its overnight gains.
There are no Canadian economic releases on tap for the day. The headline report for the week will be the January jobs figures on Friday.
Bond prices rose on a flight to safety bid in response to the negative outlook for equities.
"It's still concerns about the financial sector generally, the monolines in particular, and the risk premium is really causing a bid to two years in the U.S. and by extension, Canada," said Mark Chandler, fixed income strategist at RBC Capital Markets.
U.S. monoline bond insurers are the latest in the financial sector to be hit by the U.S. subprime mortgage malaise. The bond insurers are in danger of losing their triple-A ratings due to exposure to subprime-mortgage-linked securities.
The overnight Canadian Libor rate LIBOR01 was at 4.0500 percent, down from 4.0667 on Friday.
Monday's CORRA rate CORRA= was 4.01 percent, up from 4.0062 percent on Friday. The Bank of Canada publishes the previous day's rate at around 9 a.m. daily.
The two-year bond rose 13 Canadian cents to C$102.05 to yield 3.077 percent. The 10-year bond climbed 56 Canadian cents to C$101.79 to yield 3.770 percent.
The yield spread between the two- and 10-year bond was 69.8 basis points, up from 68.8 points at the previous close.
The 30-year bond jumped 90 Canadian cents to C$115.10 to yield 4.109 percent. In the United States, the 30-year treasury yielded 4.297 percent.
The three-month when-issued T-bill yielded 3.35 percent, up from 3.34 percent the previous close.
Reporting by John McCrank; Editing by Scott Anderson