Canada dollar falls before Fed decision, bonds up

Tue Dec 11, 2007 10:14am EST
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 By John McCrank
 TORONTO, Dec 11 (Reuters) - The Canadian dollar fell
against the U.S. dollar on Tuesday ahead of a widely expected
interest rate cut by the U.S. Federal Reserve to help contain
an economic downturn caused by the U.S. housing crisis.
 Canadian bond prices, with no domestic data to influence
moves, followed the larger U.S. Treasury market higher.
 At 9:55 a.m. (1455 GMT), the Canadian dollar was at 98.93
U.S. cents, valuing a U.S. dollar at C$1.0108, down from
Monday's session close of 99.41 U.S. cents, or C$1.0059.
 The Fed announces its policy decision at around 2:15 p.m.
 The markets have priced in a 25-basis-point cut to the fed
funds rate and a one-in-four chance of a 50 basis point cut.
 A quarter-point cut to the fed funds rate would bring North
American interest rates in sync at 4.25 percent. The Bank of
Canada cut its key rate by 25 basis points last week.
 While lower interest rates in a country generally make its
currency less attractive, the U.S. dollar has performed well
against most currencies since the Fed cut last cut its fed
funds rate at the beginning of November.
 That's largely because the market interpreted the move as
helping to ward off the possibility of a recession in the
world's largest economy, and another Fed cut would likely lead
to the same response by the market, said Shaun Osbourne, chief
currency strategist at TD Securities.
 "The growth outlook globally is deteriorating and the Fed
may be seen as being a little bit ahead of the curve relative
to the rest of the world, if it cuts rates and today suggests
rates may move a little bit lower moving forward."
 "That could actually be a positive for the U.S. dollar."
 Osborne sees the Canadian dollar performing well in the
short term against the U.S. dollar, as it may have fallen too
far too quickly from its early-November peak of US$1.10.
 But then U.S. dollar strength should kick in again,
especially if the global growth outlook improves, he said.
 Canadian bond prices headed higher along with U.S.
Treasuries as traders repositioned ahead of the Fed interest
rate announcement.
 The overnight Canadian Libor rate LIBOR01 was at 4.2500
percent, up from 4.2467 percent on Monday.
 Monday's CORRA rate CORRA= was 4.2655 percent, down from
4.2580 percent.
 The two-year bond gained 2 Canadian cents to C$100.94 to
yield 3.747 percent. The 10-year bond added 32 Canadian
cents to C$99.80 to yield 4.025 percent.
 The yield spread between the two-year and 10-year bond
moved to 27.8 basis points from 30.7 at the previous close.
 The 30-year bond increased 65 Canadian cents to C$114.08 to
yield 4.201 percent. In the United States, the 30-year treasury
yielded 4.166 percent.
 The three-month when-issued T-bill yielded 3.90 percent,
unchanged from the previous close.
 (Editing by Bernadette Baum)