January 7, 2008 / 10:11 PM / 10 years ago

Dollar slips on oil, subprime rumors

TORONTO (Reuters) - The Canadian dollar ended Monday’s North American session at a 2-1/2 week low against the U.S. dollar as falling oil prices and some unsubstantiated rumors of a big writedowns at a Canadian bank combined to sour sentiment towards the currency.

Canadian bond prices ended higher in response to steep losses on the Toronto Stock Exchange, which prompted investors to seek the safety of government debt.

The Canadian dollar closed at C$1.0056 to the U.S. dollar, or 99.44 U.S. cents, down from C$1.0013 to the U.S. dollar, or 99.87 U.S. cents, at Friday’s close.

Canada is a major producer and exporter of oil and a 2.9 percent slide in U.S. crude oil prices CLc1 was a factor in the Canadian currency’s decline, said David Bradley, director of foreign exchange at Scotia Capital.

NYMEX crude, which reached a record high of $100.09 a barrel last Thursday, closed at $95.09 a barrel on Monday due to persistent global economic fears and a forecast for warm weather in the United States, which would curb heating demand.

The currency and Canadian stocks were also hammered by a rumor that one of the big Canadian banks was set to announce an $11-billion writedown related to the U.S. subprime mortgage mess.

The rumor prompted Toronto-Dominion Bank, the only one of Canada’s big six banks with no subprime-related writedowns, to repeat that has no subprime exposure.

On the central bank front, Bank of Canada Governor David Dodge said a Canadian dollar in the low to mid 90 U.S. cent range would be “totally justified in terms of the historical relationships between the terms of trade, domestic performance, and so on,” news agency Market News reported.

Dodge was speaking on the sidelines of a meeting of the Bank for International Settlements in Basel, Switzerland.

The Canadian dollar rose to a modern-day high of US$1.1039 on November 7 on the back of robust commodity prices, a strong economy, and a weakening greenback, prompting government and central bank officials to voice concerns about possible negative effects on the economy. The currency then fell back to around parity with the U.S. dollar, where it has hovered since.

Dodge also warned that a slowdown of the U.S. economy in the first half of 2008 could have a bigger impact on the Canadian economy than was expected a just few months ago.

BONDS RISE

Canadian bond prices rose on safe-haven appeal as Toronto stocks chalked up losses.

“The stock markets are the ones driving this and in as much as I thought stock markets were a little bit too optimistic in December, they have now jumped to the other side and they are now overly pessimistic,” said Carlos Leitao, chief economist at Laurentian Bank of Canada

“I guess the markets are expecting some really bad economic news and some aggressive interest rate cuts by both the Fed and the Bank of Canada.”

Recent data have suggested that the U.S. Federal Reserve could cut interest rates by as much as half a percentage point at its January 29-30 meeting, while the Bank of Canada is expected to cut rates by 25 basis points later this month.

The two-year bond rose 4 Canadian cents to C$101.29 to yield 3.536 percent. The 10-year bond added 21 Canadian cents to C$101.02 to yield 3.869 percent.

The yield spread between the two-year and 10-year bond was 33.3 basis points, down from 33.6 at the previous close.

The 30-year bond climbed 35 Canadian cents to C$116.27 to yield 4.048 percent. In the United States, the 30-year treasury yielded 4.339 percent.

The three-month when-issued T-bill yielded 3.77 percent, down from 3.78 percent at the previous close.

Editing by Peter Galloway

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