January 17, 2008 / 2:34 PM / in 10 years

Loonie flat after overnight gain reversed

TORONTO (Reuters) - The Canadian dollar was almost flat versus the U.S. dollar on Thursday after handing back the bulk of its overnight gain given global economic concerns.

Domestic bond prices turned lower, following the lead of the bigger U.S. Treasury market, after economic data from the United States showed an unexpected drop in jobless claims.

At 9:05 a.m. EST, the Canadian unit was at 97.82 U.S. cents, valuing a U.S. dollar at C$1.0223, up from 97.60 U.S. cents, or C$1.0246, at Wednesday’s close.

A record quarterly net loss from brokerage Merrill Lynch MER.N stirred credit crisis fears and was expected to weigh on equity markets, which will ultimately curb investor appetite for the Canadian dollar.

The domestic currency rallied overnight to 98.21 U.S. cents along with higher equity markets overseas and oil prices, but the likelihood of another drop in North American stock markets ate away at the gains.

“It’s trading lock-step with global equity markets as Canada in particular is seen as such a strong play on global growth because of the nature of Canada’s exports,” said Adam Cole, currency strategist at RBC Capital Markets in London.

The Canadian dollar is down about 3 percent in 2008, and much of that drop has been blamed on weaker equity markets and fears that demand for commodities will wane if the U.S economy slides into recession.

The United States consumes about three-quarters of Canada’s exports, and as the odds of a recession in the United States increase, the outlook for Canada sours.

Further moves in the Canadian dollar could be limited early in the session as investors await comments from U.S. Federal Reserve Chairman Ben Bernanke, who is due to testify before the U.S. Congress at 10:00 a.m.

The last piece of domestic data due ahead of the Bank of Canada’s January 22 rate announcement is the November manufacturing shipments report on Friday.

The Bank of Canada is widely expected to cut its key rate by 25 basis points to 4.00 percent in an attempt to bolster the economy following a steady string of weak economic data.

BONDS FALL

Canadian bond prices, with no major domestic data to consider, took their cue from U.S. Treasuries and turned lower on the short end of the curve after data showed U.S. jobless claims dropped.

Domestic data showed foreigners reduced their holdings of Canadian securities by C$4.84 billion in November, but the report is not generally considered a market move.

The overnight Canadian Libor rate was at 4.2733, percent, down from 4.2900 percent on Wednesday.

Wednesday’s CORRA rate was 4.2616 percent, up from, 4.2598 on Tuesday. The Bank of Canada publishes the previous day’s rate at around 9:00 a.m. daily.

The two-year bond was down 6 Canadian cents at C$101.67 to yield 3.315 percent. The 10-year was off 1 Canadian cent at C$101.33 to yield 3.829 percent.

The yield spread between the two-year and 10-year bond was 51.3 basis points, down from 53.2 at the previous close.

The 30-year bond was up 11 Canadian cents at C$115.87 to yield 4.069 percent. In the United States, the 30-year Treasury yielded 4.335 percent.

The three-month when-issued T-bill yielded 3.61 percent, unchanged from the previous close.

Editing by Renato Andrade

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