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* Canadian dollar demand falls as stock market drops
* Stock selloff prompts safe haven bid in bond market
* Canada housing starts rise above expectations in August
By John McCrank
TORONTO, Sept 9 (Reuters) - The Canadian dollar fell more than half a cent against the U.S. dollar on Tuesday as commodity prices weakened, leading to Toronto stocks taking a drubbing and a drop in demand for the currency to buy Canadian assets.
Bond prices rose on a safe haven bid as Canadian stocks fell sharply on the commodity slump, causing 30-year government bond yields to touch a record low.
The Canadian unit closed the North American session at C$1.0706 to the U.S. dollar, or 93.41 U.S. cents, down from C$1.0647 to the U.S. dollar, or 93.92 U.S. cents, at Monday's close.
Canada is a major exporter of commodities and a recent downturn in the commodity cycle has weighed heavily on its markets.
The price of U.S. crude oil CLc1 is down almost 30 percent from the record high above $147 a barrel it hit in July, and gold XAU= is sitting at a three-week low of $776 an ounce, well off the record high of $1,030.80 an ounce it hit in March.
The Toronto Stock Exchange closed the session down 487.88 points, led by a 6.5 percent fall in the energy sector and a 8.2 percent fall in the materials sector.
The TSX has fallen 20 percent from the record high reached in June, and that is hurting Canada's currency, said Shane Enright, currency strategist at CIBC World Markets.
"We have seen some interest from some of the real money players to switch out of the Canadian asset market and into the U.S. asset market and that's been reflected in the TSX and I think it's been reflected in the lagged Canadian dollar performance," he said.
BOND PRICES RALLY
Canadian bond prices rose in a safe haven bid as investors sought more secure assets amid the market turmoil.
"Equities are down across the board, you've got credit worries across the board and financial system worries, so that's driving everything," said Mark Chandler, fixed income strategist at RBC Capital Markets.
Bonds had started the session lower as some stronger-than-expected Canadian housing data gave more reason to believe that the Bank of Canada would not need to cut interest rates any time soon to spur economic growth.
Canadian Mortgage and Housing Corp said housing starts rose 13 percent in August to a seasonally adjusted annualized rate of 211,000 units from 186,500 units in July.
The two-year bond rose 8 Canadian cents to C$100.10 to yield 2.703 percent, while the 10-year rose 18 Canadian cents to C$106.50 to yield 3.456 percent.
The yield spread between the two-year and 10-year bond was 76.8 basis points, up from 73.3 basis points at the previous close.
The 30-year bond gained 21 Canadian cents to C$118.21 for a yield of 3.935 percent, a record low. In the United States, the 30-year Treasury yielded 4.178 percent.
The three-month when-issued T-bill yielded 2.42 percent, unchanged from the previous close. (Editing by Peter Galloway)