CANADA FX DEBT-C$ drops 1-1/2 cents on euro-zone debt fears
* Touches low of C$1.0182 to US$, or 98.21 U.S. cents
* C$ could be under pressure for next few days
* Bonds higher across the curve (Updates to close of North American session)
By John McCrank
TORONTO, April 27 (Reuters) - The Canadian dollar CAD= dropped more than a 1-1/2 cents against the greenback on Tuesday on fears about sovereign debt levels in Europe after Standard & Poor's slashed Greece's debt rating to junk status, which spurred a flight to safety in the U.S. dollar.
Canadian bond prices rose across the curve on the downgrade, as well as a cut to Portugal's rating, as equities sold off and investors sought the stability of Canadian debt.
The Canadian currency ended the North American session at C$1.0176 to the U.S. dollar, or 98.27 U.S. cents, down from Monday's finish at C$1.0014 to the U.S. dollar, or 99.86 U.S. cents. The currency touched a low of C$1.0182 to the U.S. dollar, or 98.21 U.S. cents.
It was the biggest one-day drop for the Canadian dollar since late January.
"The Canadian dollar has lost over a cent on the day and the majority of that move came the instant the downgrades were announced," said Eric Lascelles, chief economics and rates strategist at TD Securities.
The S&P cut Greece's rating, citing concerns about the euro zone country's ability to implement reforms to slash its massive debt. [ID:nLDE63P1EG]
Portugal was downgraded on worries about its ability to deal with high debt levels due to its weak economic outlook. [ID:nWNA9638]
Lascelles said the moves led investors to favor the U.S. dollar at the expense of almost every other currency due to the greenback's traditional safe haven status.
The concerns in Europe also helped lead to a nearly 2 percent drop in the price of oil, which is major Canadian export and often influences the strength of the country's currency.
Camilla Sutton, a currency strategist at Scotia Capital, said the euro-zone concerns may mean the Canadian dollar will be under pressure in the short term, but that a recovery is likely.
"In the next few days, certainly, risk will be elevated in the system, which would imply we will see a weaker Canadian dollar," she said. "Though I think in the long term, the trend is still in place and the economic fundamentals, as well as the sovereign position of Canada, are still there to see a strong Canadian dollar."
Lascelles said the Canadian dollar would likely take "a bit of a breather," but should remain fairly close to parity.
BOND PRICES RALLY
Canadian bond prices were sharply higher on safe-haven buying, as were most other bond markets.
"The bond markets of the world have united in enjoying quite a strong bid," Lascelles said.
"The global risk aversion story is back on the front burner with the Greece and Portugal downgrades and that's where the concern is lying right now and investors are simply seeking safety in the general sense."
Looking forward, the U.S. Federal Reserve is set to make an interest rate decision on Wednesday.
While no one expects the Fed to move rates, investors will be listening carefully for any indication of when the central bank might start raising them from their record low levels.
There is no major Canadian economic data until the end of the week, when gross domestic product data from February will be released.
The two-year Canadian government bond CA2YT=RR was up 12 Canadian cents at C$99.26 to yield 1.913 percent, while the 10-year bond CA10YT=RR jumped 59 Canadian cents to C$101.15 to yield 3.601 percent.
Canadian government bonds underperformed U.S. issues, with the 10-year yield 13.1 basis points below its U.S. counterpart. (Reporting by John McCrank; editing by Peter Galloway)
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