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(Corrects paragraph 8 to show market pricing in 71 percent probability of 50 basis point cut later in month, rather than 25 point cut, and a 29 percent chance of a 75 point move, rather than a 50 point move)
* Canadian dollar falls 1.4 percent versus the greenback
* Bank of Canada cuts key rate 50 basis points to 2.5 pct
* Bonds mixed with short end reflecting more rate cuts
By John McCrank and Jennifer Kwan
TORONTO, Oct 8 (Reuters) - The Canadian dollar lost more ground against the U.S. dollar on Wednesday, falling below 90 U.S. cents for the first time since April 2007, as investors bet the Bank of Canada would slash interest rates again later this month.
So far this week the currency has dropped 3.7 percent on top of last week's 4.5 percent slide.
Bond prices were mixed, with the short end reflecting market expectations of lower central bank rates.
The Canadian dollar ended the North American session at C$1.1229 to the U.S. dollar, or 89.06 cents, down from C$1.1073 to the U.S. dollar, or 90.31 cents, at Tuesday's close.
The Bank of Canada, along other major central banks around the world, cut its key lending rate on Wednesday in an attempt to help shore up investor confidence and get credit flowing.
The surprise rate cut, which brings the bank's key rate down by 50 basis points to 2.50 percent, comes ahead of its scheduled interest rate announcement on Oct. 21. See [ID:nN08492471]
"The perception in the market is that the Bank of Canada has some more rate cuts to go," said Michael Gregory, senior economist at BMO Capital Markets, noting that could lead to more Canadian dollar weakness.
After the co-ordinated rate cuts, Thomson Reuters data showed the market pricing in a 71 percent probability of a 50 basis point cut to the Bank of Canada's overnight rate later in the month, and a 29 percent chance of 75 point move. BOCWATCH
The outlook for the U.S. economy, which the International Monetary Fund said is on the brink of recession, added to the downward pressure on Canada's currency.
"The U.S. is in dire shape and that is going to hurt Canada," he added.
The U.S. economy takes in over three-quarters of Canadian exports.
But the financial turmoil is not confined to North America, and with global growth receding, so too is demand for commodities, which is yet another blow to the prospects of the Canadian dollar.
Oil and other natural resources make up around half of Canada's exports.
BOND PRICES MIXED
Bond prices were mixed, with the short end higher, reflecting expectations of more Bank of Canada easing, and the long end following the U.S. market lower on rising U.S. debt supply.
"Initially, with the equities moving lower you had a flight to safety in the fixed-income markets but then the market started to reflect concern about potential increases in government debt, and that then resulted in yields being bid up in U.S. markets," said Paul Ferley, assistant chief economist, Royal Bank of Canada.
"Those trends have tended to spill over to Canadian markets."
Bond yields and prices move in opposite directions.
The safe-haven bid that has been a boon to bond markets in recent weeks is likely to continue over the next few months, said BMO's Gregory.
"At the margin, this (co-ordinated central bank action) will help, but whether this is a panacea, no way. No way," he said.
"From an economic standpoint, or a volatility standpoint, there's probably more of a rough ride ahead before things start to stabilize."
The yield on the two-year bond, with most closely reflects market expectations of future interest rate levels, earlier touched its lowest point in decades, below 2.1 percent.
The two-year bond ended up 21 Canadian cents to C$101.20 to yield 2.173 percent. The 10-year bond slipped 63 Canadian cents to C$105.35 to yield 3.587 percent.
The yield spread between the two-year and the 10-year bond rose to 133 basis points from 116 basis points at the previous close.
The 30-year bond dropped C$1.25 to C$114.35 to yield 4.139 percent. In the United States, the 30-year Treasury yielded 4.076 percent.
The three-month when-issued T-bill yielded 1.55 percent, up from 1.45 percent at previous close. (Editing by Peter Galloway)