UPDATE 1-Canada dollar falls as rates seen dropping further

Wed Oct 8, 2008 2:10pm EDT
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 * 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
 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.
 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
 "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
 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
 "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
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)