By Frank Pingue
TORONTO, March 17 (Reuters) - The Canadian dollar dropped against the U.S. dollar on Monday as nagging concerns about the health of the U.S. economy convinced investors to unload risky assets despite lofty commodity prices.
Domestic bond prices rose across the curve as the worsening crisis in U.S. financial markets raised investors' appetite for secure assets like government debt, while Canadian data took a backseat.
At 9:35 a.m. (1335 GMT), the Canadian dollar was at US$1.0055, valuing a U.S. dollar at 99.45 Canadian cents, down from US$1.0140, valuing a U.S. dollar at 98.62 Canadian cents, at Friday's close.
The currency's fall comes after liquidity-boosting measures by the U.S. Federal Reserve over the weekend did little to ease worries about the health of the economy in the United States, which consumes the bulk of Canada's exports.
News that Bear Stearns will be bought by rival JP Morgan Chase for a bargain price compounded the deteriorating risk sentiment that shook the Canadian dollar as investors moved out of higher-yielding currencies.
"There's been a dramatic decline in risk appetite so risk aversion is moving higher." said George Davis, chief technical strategist at RBC Capital Markets. "But for the most part ... the Canadian dollar has really been on the sidelines compared to a lot of the other currencies."
The domestic currency's fall was likely cushioned by a rise in prices for gold and oil, two key Canadian exports, to record highs earlier on Monday.
Indeed, the Canadian dollar held up well compared with some other commodity-linked currencies such as the Australian dollar.
Domestic data that showed Canada's factory sales rebounded in January had little impact on the currency. The key Canadian piece of economic data due this week will be the consumer price index report for February 2008, due on Tuesday.
"I suspect through most of this week the data will take a secondary role," said Doug Porter, deputy chief economist at BMO Capital Markets. "I'm not saying it's going to be ignored, but I think, especially today, it will take a back seat."
Canadian bond prices were higher as investors shrugged off a stronger-than-expected piece of Canadian data and took their cue from the bigger U.S. Treasury market, where fears about the banking system sparked a mad dash for government debt.
Higher car sales boosted Canadian manufacturers' sales in January by 1.3 percent, topping expectations for a gain of 0.9 percent.
But the fire sale of Bear Stearns and the cut in the Fed's discount rate kept investors hungry for more secure assets.
"Canadian bonds are following their Treasury counterparts," said Porter. "They are not quite keeping up with the serious rally we're seeing in the U.S. ... but we are seeing a lot of multi-decade lows, or near-multi-decade lows, probed or at least approached at various maturities."
The overnight Canadian Libor rate LIBOR01 was 3.6750 percent, down from 3.5816 percent on Friday.
Thursday's CORRA rate CORRA= was 3.4545 percent, down from 3.4798 on Wednesday. The Bank of Canada publishes the previous day's rate at around 9 a.m. daily.
The two-year bond dropped 23 Canadian cents to C$103.24 to yield 2.297 percent. The 10-year bond fell 36 Canadian cents to C$104.36 to yield 3.437 percent.
The yield spread between the two- and 10-year bond was 119.6 basis points, up from 105.3 points at the previous close.
The 30-year bond dropped 1 Canadian cent to C$116.75 to yield 4.020 percent. In the United States, the 30-year treasury yielded 4.321 percent.
The three-month when-issued T-bill yielded 2.08 percent, down from 2.23 percent at the previous close. (Editing by Bernadette Baum)