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By Frank Pingue
TORONTO, Jan 11 (Reuters) - The Canadian dollar plummeted to its lowest level in a month versus the U.S. dollar on Friday morning after domestic jobs data showed an unexpected job loss, all but solidifying a Bank of Canada rate cut in January.
Domestic bond prices were higher across the curve as the surprise weakness in the jobs report triggered more talk about what impact the weak U.S. economy will have on Canada.
At 8:05 a.m. (1305 GMT), the Canadian dollar was at 98.02 U.S. cents, valuing a U.S. dollar at C$1.0202, down from 99.27 U.S. cents, or C$1.0074, at Thursday's close.
The jobs report extended a steady string of weak domestic economic reports in the past week, but the Canadian dollar's reaction to the key jobs data was the largest.
It fell as low as 97.84 U.S. cents moments after the data.
After three straight months of red-hot growth, Canada's economy unexpectedly shed 18,700 jobs in December, well below the median forecast in a Reuters poll for an additional 15,000 jobs to be created.
"The Canadian dollar softened up hugely as you would expect because this was very much a disappointing number," said Eric Lascelles, chief economics and rates strategist at TD Securities.
"People know Canada is affected by the U.S. slowdown, the credit crunch and so on, but I don't think people were looking necessarily to the labor market for a huge reflection of that."
The Canadian dollar is now down about 2.8 percent in 2008 and weak domestic data has played a key role in its fall.
Last Friday, the currency tumbled more than 1 cent after the Ivey Purchasing Managers Index indicated economic activity in Canada contracted. That was followed more losses this week after weak data on housing starts and building permits.
The Bank of Canada had already been widely expected to cut its key interest rate for a second time since December on Jan. 22, and the jobs data is expected to ashore up expectations. The bank's key overnight rate is currently at 4.25 percent.
Canadian bond prices were boosted across the curve as the data supported market expectations for a Bank of Canada rate cut later this month.
"I think the Bank of Canada is already prepped for rate cuts and I think it validates that position," said Lascelles. "I don't think we're at the point where a 50 basis point rate cut is at all justified in Canada but the 25s are good to go."
The overnight Canadian Libor rate LIBOR01 was at 4.2066 percent, down from 4.2350 percent on Thursday.
The two-year bond was up 13 Canadian cents at C$101.65 to yield 3.332 percent. The 10-year bond rose 20 Canadian cents to C$101.21 to yield 3.844 percent.
The yield spread between the two-year and 10-year bond was 51.2 basis points, up from 46.1 at the previous close.
The 30-year bond was up 2 Canadian cents at C$115.70 to yield 4.078 percent. In the United States, the 30-year treasury yielded 4.457 percent.
The three-month when-issued T-bill yielded 3.68 percent, down from 3.75 percent at the previous close.
(Editing by Renato Andrade)