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TORONTO (Reuters) - The Canadian dollar rose 1.5 percent against a slumping greenback on Friday as concerns about the health of the U.S. economy revived expectations of another U.S. interest rate cut.
Canadian bond prices fell as rallying Canadian stocks eroded the recent safe haven bid for government debt.
The Canadian dollar closed at C$1.0611 to the U.S. dollar, or 94.24 U.S. cents, up from C$1.0765 to the U.S. dollar, or 92.89 U.S. cents, at Thursday's close.
During the session, the Canadian dollar rose as high as C$1.0587 to the U.S. dollar, or 94.46 U.S. cents.
For the week, the currency ended 0.2 percent higher, despite falling to a 13-month low on Thursday, when the U.S. dollar was well bid.
"A lot of the trends that we've seen building up over the last few days have just gone into compete reversal," said Shaun Osborne, chief currency strategist at TD Securities.
Investors stepped back from the greenback rally, in part due to nagging concerns about the health of the U.S. financial sector. Struggling U.S. investment bank Lehman Brothers LEH.N was at the center of market worries, as investors questioned whether it would be able to find a buyer, given the U.S. government's reluctance to provide financial support.
That made some market players rethink the likelihood of the U.S. Federal Reserve cutting its key lending rate when it meets next week, Osborne said.
"There is a sort of current of feeling bubbling under the market that if we can't get a Lehman deal over the weekend, we're going to get a Fed deal, perhaps, on Tuesday," he said.
Further hurting the greenback were weak numbers for U.S. retail sales and producer price data.
Canadian bond prices were also swayed by data from south of the border, falling along with the larger U.S. Treasury market after consumer confidence data surprised to the upside.
A strong day for Canadian stocks further added pressure on bond prices, said Sal Guatieri, senior economist at BMO Capital Markets.
"That's taking some funds out of bond markets," he said. "You are seeing some reversal of the safe haven bid and flight to quality action."
Canadian data showed that industries ran at just 78.9 percent of their capacity in the second quarter of this year, which was the lowest level in 16 years and below expectations for a reading of 79.3 percent. The market, however, did not move on the figures.
The two-year bond dropped 10 Canadian cents to C$99.94 to yield 2.780 percent, while the 10-year shed 83 Canadian cents to C$105.30 to yield 3.597 percent.
The yield spread between the two-year and 10-year bond was 82.0 basis points, up from 74.0 basis points at the previous close.
The 30-year bond fell C$1.68 to C$115.97 for a yield of 4.053 percent. In the United States, the 30-year Treasury yielded 4.320 percent.
The three-month when-issued T-bill yielded 2.39 percent, up from 2.38 percent at the previous close.
Reporting by John McCrank; Editing by Peter Galloway