August 9, 2011 / 12:21 PM / 6 years ago

CANADA FX DEBT-C$ falls below parity, first time since Feb

* C$ dips below parity, pares losses

* C$ at C$0.9930 to the U.S. dollar, or $1.0070

* Bond prices retreat after Monday's surge

* U.S. Federal Reserve meeting in focus

By Ka Yan Ng

TORONTO, Aug 9 (Reuters) - Canada's dollar dropped below parity with the U.S. currency for the first time in half a year on Tuesday, but pared losses as hope mounted that the U.S. Federal Reserve would offer some soothing words to shore up investor confidence.

Falling as low as C$1.0010 to the U.S. dollar, or 99.90 U.S. cents, it was the first time the Canadian currency has been weaker than the greenback since Feb. 1.

"A lot of it was risk aversion and commodity prices driven," said Charles St-Arnaud, Canadian economist and currency strategist at Nomura Securities International in New York.

The Canadian dollar was not the only commodity currency under pressure following heavy falls in the overnight session. At one point, the Australian dollar fell below parity against the U.S. dollar, sliding to $0.9927 AUD=D4, its lowest in about five months, but later recovered to $1.0157. The Aussie has lost about 10 cents from a 29-year peak of $1.1081 set just two weeks ago.

Meanwhile, the drop below parity put the Canadian dollar's losses at more than 6 cents less than a month ago. It was within striking distance of hitting a modern-day high but has been swept up in the global sell-off of riskier assets. [ID:nN1E76K0DV]

The price of oil, a key Canadian export, was also lower and fell below $80 a barrel for the first time since October, keeping pressure on the Canadian dollar. [O/R]

Uncertainty over economic growth in the United States is a major factor putting pressure on the Canadian dollar, the U.S. being Canada's biggest trading partner.

However, U.S. and Canadian stock index futures rose on Tuesday, suggesting the possibility of a partial rebound from the last few days of sharp losses.

Focus was on a meeting of the U.S. Federal Reserve's policy-setting committee later in day, with investors likely to scour for hints about any new monetary stimulus programme with fears of a new global downturn growing. [ID:nN1E77723B]

The trouble is, the Fed's policy toolkit looks rather depleted, making some question the likely effectiveness of any further monetary stimulus.

"It seems gradually now there seems to be a bit more optimism today, a bit of hope that the Fed will probably signal that they're willing to take more action," said St-Arnaud.

"It's still unclear what kind of action they can really take at this juncture."

At 8:03 a.m. (1203 GMT), the Canadian dollar CAD=D4 had pared losses, trading at C$0.9930 to the U.S. dollar, or $1.0070, compared with Monday's North American session close at C$0.9909 to the U.S. dollar, or $1.0092.

Canada's two-year bond CA2YT=RR fell 12 Canadian cents to yield 0.862 percent, while the 10-year bond CA10YT=RR shed 18 Canadian cents to yield 2.507 percent. (Reporting by Ka Yan Ng, Editing by Chizu Nomiyama)

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