CANADA FX DEBT-C$ weakens as economy, rate outlook weigh
* C$ weakens to C$0.9948 to the U.S. dollar, or $1.0052
* Bond yields drop to near record lows
* Bank of Canada seen keeping low rates longer post-Fed
By Andrea Hopkins
TORONTO, Aug 10 (Reuters) - The Canadian dollar weakened against the U.S. currency on Wednesday, hurt by concern about a global economic slump, Europe's debt woes and the prospect of prolonged low interest rates.
Global stocks also fell as rumors about the health of French banks sparked concern that the euro zone's debt crisis could claim new victims. U.S. stocks fell more than 4 percent. [MKTS/GLOB]
On the upside, safe-haven gold hit another record, while Toronto stocks bucked the trend to end 0.74 percent higher. [.TO]
"Global prospects aren't good, in part driven by U.S. economic prospects ... That's all negative for the Canadian dollar at this stage," said Michael Gregory, senior economist at BMO Capital Markets.
"We've come off our peaks, and right now I think we'll drift around parity, plus or minus a cent, moving sideways. And trade off what happens south of border and commodity prices."
A late surge in oil prices, an important Canadian export, failed to give much lift to the Canadian currency. Brent crude futures rose 4 percent after a government report showed U.S. oil inventories fell last week. [O/R]
The Canadian dollar CAD=D4 ended the North American session at C$0.9948 to the U.S. dollar, or $1.0052, more than a penny below Tuesday's session close at C$0.9789 to the U.S. dollar, or $1.0216.
Tuesday's dovish statement by the U.S. Federal Reserve has raised expectations that the Bank of Canada to keep its interest rates lower for longer, with markets even betting on a rate cut by year-end. [ID:nN1E77915R]
Canadian overnight index swaps, which are based on expectations for the Bank of Canada's key policy rate, have fully priced in odds of a 25-basis points rate cut later this year on mounting fears of a global slowdown. BOCWATCH
"What it means for the BoC is that we have even greater conviction toward our forecast that the BoC is on hold until next spring or possibly much longer," wrote Scotia Capital economists Derek Holt and Karen Cordes Woods on Wednesday.
Higher interest rates tend to help currencies strengthen by attracting international capital flows.
While many economists believe a Canadian rate hike could happen next year, the currency isn't expected to return to recent peaks until the risk of a U.S. recession fades.
"As long as we're on easing watch south of the border, the Canadian dollar probably has a weakening bias," Gregory said.
Canada's sale of 3-year government bonds met with solid demand earlier in the session, helped by continued global anxiety about the U.S. economy and expectations that rates will stay low for a long time. [ID:nN1E77914B]
The C$3 billion ($3.03 billion) auction of bonds produced an average yield of 0.965 percent, down from 2.037 percent at the last 3-year bond auction in May.
Canadian bond yields, like their U.S. peers, have traded at or near record lows in the wake of the Fed decision, though Canadian bonds lagged the price gains made by Treasuries on Wednesday. [US/]
Canada's 10-year bond CA10YT=RR gained C$1.10 to yield 2.335 percent In the wake of the 2008 financial crisis its yield had fallen to around 2.5 percent. (Editing by Jeffrey Hodgson)
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