April 18, 2008 / 9:25 PM / in 9 years

Dollar rises with oil, market optimism

TORONTO (Reuters) - The Canadian dollar rose against the U.S. dollar on Friday, fueled by record high oil prices and improved market sentiment.

Domestic bond prices ended mostly lower, as a rally in the stock markets lessened the safe-haven appeal of government debt.

The Canadian currency closed at C$1.0049 to the U.S. dollar, or 99.51 U.S. cents, up from C$1.0122 to the U.S. dollar, or 98.79 U.S. cents, at Thursday's close.

For the week, the loonie gained 1.8 percent against the greenback.

Robust prices for oil, a key Canadian export, along with the rallying equities markets were the main reasons for the move, said Matthew Strauss, senior currency strategist at RBC Capital Markets.

U.S. crude oil prices reached a record high of $117 a barrel on supply concerns ahead of the peak summer driving season. Much of the Canadian dollar's 60 percent rise since 2002 has been linked to robust oil prices.

Stock prices rallied, despite the fact that Citigroup Inc. (C.N), the largest U.S. bank, posted billions of dollars in writedowns, as investors bet the worst was over for the credit crunch.

The improved market sentiment gave a boost to the greenback, and the Canadian dollar was taken along for the ride, said Strauss.

"We've become used to the 'sell North America' theme in the last few months, but it almost seemed today that it became a buy North America -- what's good for the (U.S.) dollar is good for Canada as well," he said.

BONDS MIXED

Canadian bond prices were mostly lower along with the bigger U.S. market in response to the equities rally, which prompted investors to expect a smaller interest rate cut by the U.S. Federal Reserve, which meets later this month.

"People are now debating a cut of 25 basis points by the Fed versus zero, as opposed to (a cut of) 25 versus 50, and I find that pretty amazing," said Eric Lascelles, chief economics and rates strategist at TD Securities.

The Bank of Canada meets on Tuesday and a majority of primary securities dealers expect it to cut its key interest rate by 50 basis points to 3 percent.

Domestic data on Friday showed wholesale trade fell 1.8 percent in February, missing market expectations for a 0.4 percent rise.

The two-year bond was down 6 Canadian cents at C$101.82 to yield 2.857 percent. The 10-year bond slipped 3 Canadian cents to C$101.40 to yield 3.686 percent.

The yield spread between the two- and 10-year bonds was 82.9 basis points, down from 84.9 at the previous close.

The 30-year bond rose 20 Canadian cents to C$114.45 to yield 4.141 percent. In the United States, the 30-year treasury yielded 4.505 percent.

The three-month when-issued T-bill yielded 2.55 percent, unchanged from the previous close.

Reporting by John McCrank; editing by Rob Wilson

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