Canadian dollar closes lower despite rally in oil

Thu Jun 26, 2008 4:55pm EDT
 
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 * Canadian dollar's three-session win streak snapped
 * Drop in currency came despite surge in oil prices
 * Bonds get boost at short end on interest rate outlook
 By Frank Pingue
 TORONTO, June 26 (Reuters) - The Canadian dollar closed
lower alongside a weaker U.S. dollar on Thursday as a sell
North America sentiment that spread into equities dominated the
market even though oil prices surged to a record high.
 Canadian bond prices finished mostly higher as concerns
about financial-services companies and pared down expectations
for U.S. interest rate hikes sparked a bid for government
debt.
 The Canadian dollar closed at C$1.0131 to the U.S. dollar,
or 98.71 U.S. cents, down from C$1.0107 to the U.S. dollar, or
98.94 U.S. cents, at Wednesday's close.
 Since oil prices hit a record above $140 a barrel during
the session, some traders thought the commodity-linked Canadian
dollar would have been given a boost since oil is a major
Canadian export and often influences the currency.
 "Why isn't it stronger?" asked Steve Butler, director of
foreign exchange at Scotia Capital. "The Canadian dollar should
be at parity (with the U.S. dollar) given oil has cracked $140.
It should be, but it's not."
 Butler suggested market participants had been banking on a
better performance for the Canadian dollar during the latest
session, but when it didn't follow oil prices higher
short-covering set in.
 The currency's slide came alongside a 1 percent drop in the
Toronto Stock Exchange's main index and a 3 percent slide in
the Dow Jones industrial average.
 Moves in the Canadian dollar this week have been contained
to a tight range that is not expected to change ahead of the
weekend as the only economic figures out in Canada on Friday
are the industrial product and raw materials indexes for May.
 Even a statement from the U.S. Federal Reserve this week
that persuaded the market to scale back calls for aggressive
U.S. rate hikes only had a mild boost for the Canadian dollar.
 "We haven't seen any data this week but it certainly feels
like things are slowing down and I just get the feeling that
the market is on the defensive here in North America for
awhile," Butler said.
 During the first half of the session the Canadian dollar
rose to C$1.0082 to the U.S. dollar, or 99.19 U.S. cents, its
highest level in three weeks, before trickling to a session low
of C$1.0133 to the U.S dollar, or 98.69 U.S. cents, just before
the close.
 BONDS EDGE HIGHER
 Canadian bond prices finished mostly higher due to fresh
concerns about the health of financial-services companies,
which sent dealers flocking into secure assets such as
government debt.
 The concerns surfaced after investment bank Goldman Sachs
said Citigroup and Merrill Lynch & Co could each take more
writedowns in the second quarter.
 That news followed comments from the U.S. Federal Reserve
on Wednesday that were not as hawkish as anticipated and
reduced expectations for rate hikes any time soon.
 "Obviously we're getting a little bit of a limited positive
spillover from the U.S. today with dimming expectations for Fed
rate hikes," said Michael Gregory, senior economist at BMO
Capital Markets.
 The two-year bond rose 14 Canadian cents to C$101.11 to
yield 3.151 percent. The 10-year bond climbed 3 Canadian cents
to C$102.21 to yield 3.706 percent.
 The yield spread between the two-year and 10-year bond was
55.5 basis points, up from 48.0 at the previous close.
 The 30-year bond fell 44 Canadian cents to C$115.53 for a
yield of 4.080 percent. In the United States, the 30-year
Treasury yielded 4.607 percent.
 The three-month when-issued T-bill yielded 2.60 percent,
down from 2.68 percent at the previous close.
 (Reporting by Frank Pingue; Editing bt Peter Galloway)