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TORONTO, March 17 (Reuters) - The Canadian dollar fell on Monday, dropping briefly below parity with the U.S. dollar for the first time since Feb. 25, dragged down by credit market woes, along with lower oil and base metal prices.
Canadian bond prices rose across the curve as investors sought the safety of government debt due to a rout on the Toronto Stock Exchange.
The Canadian dollar closed at US$1.0007, valuing a U.S. dollar at 99.93 Canadian cents, down from US$1.0140, valuing a U.S. dollar at 98.62 Canadian cents, at Friday's close.
The currency touched a low of C$1.0015 against the greenback, or 99.85 Canadian cents, towards the end of the session.
The Canadian dollar began to lose ground overnight along with the greenback as investors worried that recent emergency liquidity-boosting measures by U.S. Federal Reserve would not be enough to ease the strains in the U.S. financial system.
As the session wore on, the greenback managed make up some of its losses, but a drop in the prices of some key Canadian exports, including oil and base metals, left the Canadian dollar unable to find any traction.
The Fed's latest attempt to ease liquidity pressures came on Sunday, when it cut its discount rate by 25 basis points to 3.25 percent.
The move came as JP Morgan Chase (JPM.N) snapped up Bear Stearns BSC.N, made vulnerable by a cash crunch, for $2 a share, less than one-tenth of the bank's share price on Friday.
Recent domestic data has shown that the Canadian economy is still running at a quick clip, but most investors believe the effects of the U.S. economic downturn will make themselves felt in this country.
The United States takes in more than three-quarters of Canadian exports and the two countries share the world's largest trading relationship.
The latest domestic data showed Canada's factory sales rebounded in January, but with investors focused on financial market troubles, the report had little impact on the currency.
Higher car sales boosted Canadian manufacturers' sales in January by 1.3 percent, topping expectations for a gain of 0.9 percent.
The key Canadian piece of economic data this week will be February's inflation report, due on Tuesday.
"If we see it picking up slightly, I don't think the market is going to pay too much attention... however, if it falls even closer to the 1 percent end of the inflation target range, then it would further confirm that there is nothing standing in the way of the Bank of Canada to continue easing," said Matthew Strauss, senior currency strategist at RBC Capital Markets.
The central bank cut interest rates by 50 basis points earlier this month to 3.5 percent, and a low inflation reading could signal more aggressive easing when the bank makes its next policy decision in April, Strauss said.
Canadian bond prices rallied on a safe-haven bid as stocks in Toronto sold off in response to the credit concerns south of the border.
The bond market will be focused on the U.S. Federal Reserve meeting on Tuesday.
Futures markets are pricing in a 100-basis-point cut to the Fed's main lending rate, which would be among the largest reductions in the Fed's modern history as it tries to limit the damage from the economic downturn.
"If they cut rates by 100 basis points, that takes them down to 2 percent, so they're running out of ammunition very quickly," said Sheldon Dong, fixed income analyst at TD Waterhouse Private Investment.
The two-year bond rose 21 Canadian cents to C$103.22 to yield 2.306 percent. The 10-year bond climbed 68 Canadian cents to C$104.68 to yield 3.402 percent.
The yield spread between the two- and 10-year bond was 109.6 basis points, up from 105.3 points at the previous close.
The 30-year bond added 84 Canadian cents to C$117.60 to yield 3.975 percent. In the United States, the 30-year treasury yielded 4.271 percent.
The three-month when-issued T-bill yielded 2.10 percent, down from 2.23 percent at the previous close.