Canadian dollar hit by deteriorating world outlook
* Canadian dollar falls 0.7 percent versus greenback
* U.S. Federal Reserve backs up commercial paper market
* Bond prices fall as Fed move hits safe-haven bid
By John McCrank
TORONTO, Oct 7 (Reuters) - The Canadian dollar fell against a generally stronger U.S. dollar on Tuesday as weary investors avoided the commodity-linked currency due to concerns about fallout from the global financial crisis.
Bond prices slid after the U.S. Federal Reserve announced a plan to help money markets and free up more day-to-day lending, causing the safety bid for government debt to unwind.
The Canadian dollar ended the North American session at C$1.1073 to the U.S. dollar, or 90.31 cents, down from C$1.0992 to the U.S. dollar, or 90.98 cents, at Monday's close.
The currency shed 0.7 percent against its U.S. counterpart after dropping 1.6 percent on Monday, and 4.5 percent last week, mostly in response to a stronger U.S. dollar.
"General U.S. dollar strength right now is driving everything and the Canadian dollar just gets pulled around," said Jacqui Douglas, a currency strategist at TD Securities.
The cascading effects of the credit crisis have created an unfavorable environment for the Canadian dollar, with the downtrend already firmly established.
"I don't think the Canadian dollar is going to be hitting parity again with the U.S. dollar any time soon," said Douglas.
With lenders afraid to lend to one another in the wake of the collapses of some of the biggest names in the financial industry, U.S. dollar funding has become difficult to come by, and that scarcity has put a premium on the greenback.
The U.S. dollar has also regained its status as a safe haven asset, in part due to deteriorating economic outlooks elsewhere in the world, which have weakened other currencies.
That bleaker global outlook has undercut support for commodities, which make up around half of Canada's exports.
"This credit crisis is just spreading everywhere," said Douglas. "It's now firmly into European territory now, with problems with the U.K. and European banks. So with the global economy slowing, I think that people are worried about where commodity prices are going."
BOND PRICES FALL
Canadian bond prices unwound from their recent safe-haven bid along with the larger U.S. Treasury market, spurred by a plan by the Fed to buy up unspecified amounts of commercial paper to get liquidity flowing.
Commercial paper is an important source of day-to-day funding for many businesses, but issuance has nearly ground to a halt due to the credit crunch.
With large corporations unable to issue commercial paper or to roll over existing commercial paper -- over $1 trillion of it already exists -- banks were being forced to keep large amounts of cash reserves. Corporate clients had set up credit lines that could be tapped if they were unable to roll over the commercial paper.
"Now, they no longer need to do that," said Carlos Leitao. "They (companies) can go straight to the government, so that should, in principal, relieve the pressure off the banks and at least get the interbank markets to function a little bit more normally."
The Bank of Canada said that at this time it does not intend to join co-ordinated central bank actions aimed at increasing U.S. dollar liquidity. It said the Canadian financial sector is well supported.
The two-year bond fell 8 Canadian cents to C$101.00 to yield 2.269 percent. The 10-year bond dropped 63 Canadian cents to C$106.02 to yield 3.508 percent.
The yield spread between the two-year and the 10-year bond dipped to 116 basis points from 118 basis points at the previous close.
The 30-year bond dropped C$1.28 to C$115.82 to yield 4.060 percent. In the United States, the 30-year treasury yielded 4.015 percent.
The three-month when-issued T-bill yielded 1.55 percent, unchanged from the previous close. (Reporting by John McCrank; editing by Rob Wilson)
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