UPDATE 1-Canada dollar falls as rates seen dropping further
* Canadian dollar falls 1 percent vs greenback
* Bond prices mixed after rallying earlier
* Bank of Canada cuts rate 50 basis points to 2.5 pct
(Recasts, adds analysts' comments, updates figures)
By John McCrank and Jennifer Kwan
TORONTO, Oct 8 (Reuters) - The Canadian dollar fell 1 percent against the U.S. dollar on Wednesday as investors bet the Bank of Canada would cut interest rates further to spur economic growth in response to expectations of a weaker U.S. growth and dwindling demand for commodities.
Bond prices were mixed with the short end reflecting expectations of further central bank easing.
At 1:40 p.m. (1740 GMT), the Canadian dollar was at C$1.119 to the U.S. dollar, or 89.37 cents, down from C$1.1073 to the U.S. dollar, or 90.31 cents, at Tuesday's close.
The currency has tumbled 7.6 percent in the past week and a half against its U.S. counterpart.
Oil and other commodities make up around half of Canada's exports and the outlook for their prices has fallen along with expectations for the global economy.
"Global growth prospects are weakening and that's going to contribute to even weaker commodity prices, which of course, is... negative for the Canadian dollar," said Michael Gregory, senior economist at BMO Capital Markets.
"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.
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 and get credit flowing.
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 perception in the market is that the Bank of Canada has some more rate cuts to go," said Gregory, noting that could lead to more Canadian dollar weakness.
BOND PRICES MIXED
Canadian 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.
Analysts also said the Bank of Canada may not be done cutting rates, which could put further upward pressure on bond prices.
"At the margin, this (coordinated central bank action) will help, but whether this is a panacea, no way. No way," said BMO's 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 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 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.
The two-year bond rose 14 Canadian cents to C$101.13 to yield 2.207 percent. The 10-year bond slipped 74 Canadian cents to C$105.24 to yield 3.600 percent.
The yield spread between the two-year and the 10-year bond rose to 129 basis points from 116 basis points at the previous close.
The 30-year bond eased C$1.25 to C$114.35 to yield 4.139 percent. In the United States, the 30-year Treasury yielded 4.074 percent.
The three-month when-issued T-bill yielded 1.55 percent, up from 1.45 percent at previous close. (Editing by Peter Galloway)
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