Canada dollar falls on economic worry as rates cut

Wed Oct 8, 2008 10:54am EDT
 
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 * Canadian dollar falls 0.6 percent vs greenback
 * Bond prices mixed after rallying earlier
 * Bank of Canada cuts rate 50 basis points to 2.5 pct
 TORONTO, Oct 8 (Reuters) - The Canadian dollar fell against
a generally stronger U.S. dollar on Wednesday as broader
economic worries overshadowed the Bank of Canada's concerted
action with other central banks to slash interest rates in an
attempt to shore up confidence in financial markets.
 Bond prices were mixed, benefiting from worries over the
health of the global economy, but pressured by some shifting of
assets to stock markets.
 Shortly before 10:30 a.m. (1430 GMT), the Canadian dollar
was at C$1.1143 to the U.S. dollar, or 89.74 cents, down from
C$1.1073 to the U.S. dollar, or 90.31 cents, at Tuesday's
close.
 The currency was 0.6 percent lower against its U.S.
counterpart as concerns over the spreading credit crisis
continued to weigh, driving down commodity prices as investors
braced for lower demand amid a potential global recession.
 Canada is a major exporter of oil and other commodities.
 The greenback has been in high demand due to tight
liquidity and its status as a safe-haven asset.
 The Bank of Canada, along with central banks around the
world including the U.S. Federal Reserve and the Bank of
England, cut its key lending rate on Wednesday in an attempt to
help shore up investor confidence.
 "It sort of helps relieve the fears in the markets," said
David Watt, senior currency strategist at RBC Capital Markets
 "It is it going to be the panacea that gets us through the
crisis? No. But at least it helps break what was turning into a
very dark psychological development in markets where they were
just running away from fears."
 The 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. [ID:nN08492471]
 The bleak global outlook has undercut support for
commodities, which make up around half of Canada's exports.
 "The Canadian dollar is going to weaken," said Watt. "The
global economy is potentially going into a recession and that
is not a good backdrop for Canadian terms of trade or oil
prices. It's just whether or not we're going to weaken off
sharply or weaken off at a relatively modest pace."
 BOND PRICES MIXED
 Canadian bond prices were mixed, rallying initially on
safe-haven concerns, but then easing as stock markets turned
positive.
 Analysts said the Bank of Canada may not be done cutting
rates, which could put further upward pressure on bond prices.
 "We still have a (scheduled) Bank of Canada meeting in
October and it does raise the prospect that they'll cut again
and we think they will, by another 50 basis points," said
Michael Gregory, senior economist at BMO Capital Markets.
 The yield on the two-year bond, with most closely reflects
market expectations of future interest rate levels, touched its
lowest point in decades, below 2.1 percent.
 The coordinated rate cuts were part of a multi-pronged
approach to unclog the credit creation process globally, but
the market expects that more will be done.
 "At the margin, this will help, but whether this is a
panacea, no way. No way," said Gregory.
 "I think from an economic standpoint, or a volatility
standpoint, there's probably more of a rough ride ahead before
things start to stabilize."
 The Canadian overnight Libor rate LIBOR01 was 3.975
percent, up from 3.842 percent on Tuesday.
 Tuesday's CORRA rate CORRA= was 2.9954 percent, up from
2.9226 percent on Monday. The Bank of Canada publishes the
previous day's rate at around 9 a.m. daily.
 The two-year bond jumped 25 Canadian cents to C$101.24 to
yield 2.164 percent. The 10-year bond slipped 15 Canadian cents
to C$105.83 to yield 3.530 percent.
 The yield spread between the two-year and the 10-year bond
rose to 134 basis points from 123.6 basis points at the
previous close.
The 30-year bond eased 10 Canadian cents to C$115.50 to
yield 4.077 percent. In the United States, the 30-year Treasury
yielded 3.993 percent.
 The three-month when-issued T-bill yielded 1.55 percent,
down from 1.6 percent at previous close.
 (Reporting by John McCrank and Jennifer Kwan; Editing by Peter
Galloway)