Canada dollar falls before Fed decision, bonds up
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)
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