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TORONTO (Reuters) - The Canadian dollar slid 0.6 percent against the U.S. dollar on Monday after Lehman Brothers Holdings Inc LEH.N filed for bankruptcy protection, giving a bid to the greenback, and as commodity prices weakened.
Canadian bond prices saw big gains along with the larger U.S. market as investors moved out of battered equities and into more secure government debt.
The Canadian dollar ended the North American session at C$1.0679 to the U.S. dollar, or 93.64 U.S. cents, down from C$1.0611 to the U.S. dollar, or 94.24 U.S. cents, at Friday's close.
The currency hit a low point of C$1.0755, or 92.98 U.S. cents early in the session, but then reclaimed some lost ground.
"I would have thought that we would have had a test above C$1.08," said David Bradley, director of foreign exchange at Scotia Capital.
"People are just stepping back and looking at exposures other than foreign exchange and trying to figure out what other implications they're going to have with this Lehman bankruptcy," he said.
Lehman Brothers filed for bankruptcy protection early on Monday after failing to finance risky real estate bets, making it the biggest casualty so far of the global credit crisis.
The U.S. Federal Reserve tossed a lifeline to the financial sector, broadening the collateral it would accept from investment banks for direct loans.
The sharp rise in risk aversion put a bid to the greenback over fears that, as nervous investors repatriate funds, it will become a lot more difficult to obtain financing in U.S. dollars, especially with credit so hard to come by.
Commodity prices were also affected by the market turmoil, which was seen dampening demand. Canada is a major exporter of many key commodities, including oil and gold, and its currency is often influenced by moves in their prices.
The price of U.S. crude oil fell as much as $7 to $94.13 a barrel. There was no visible damage to U.S. refineries after Hurricane Ike, adding more softness to crude prices.
Canadian bond prices rallied along with U.S. treasuries as investors fled equities for the more secure bond market.
"It's a fright to quality -- not flight, but fright," Sheldon Dong, fixed income analyst at TD Waterhouse Private Investment.
The odds of a Fed interest rate cut when it meets on Tuesday were boosted by the financial uncertainty, adding to the bid in treasuries.
"Realistically, with fed funds at 2 percent, a rate cut at this point is more symbolic than anything else," said Dong.
"But I do think the market is looking for some sort of symbol and I think they'd be quite disappointed if the Fed doesn't do a 25 basis point rate cut.
A Bank of Canada spokesman said that although credit conditions in Canada remain difficult, they are better in many respects than those in major markets.
The central bank injected a total of C$2.305 billion into markets by midday to improve liquidity, its biggest such intervention since February 2000.
The two-year bond rose 66 Canadian cents to C$100.59 to yield 2.473 percent, while the 10-year added C$1.49 to C$106.77 to yield 3.423 percent.
The yield spread between the two-year and 10-year bond was 101.00 basis points, up from 82.0 basis points at the previous close.
The 30-year bond gained C$2.10 to C$118.00 for a yield of 3.946 percent. In the United States, the 30-year treasury yielded 4.079 percent.
The three-month when-issued T-bill yielded 2.25 percent, down from 2.39 percent at the previous close.
Reporting by John McCrank; editing by Rob Wilson