TORONTO (Reuters) - The Canadian dollar was knocked back below parity versus the U.S. dollar on Thursday as concerns about a U.S. recession were heightened after economic data south of the border showed a jump in jobless claims.
Domestic bond prices followed the U.S. Treasury market higher right across the curve as the weaker-than-expected U.S. data overshadowed a domestic report on gross domestic product that met estimates.
At 9:35 a.m., the Canadian unit was at C$1.0059 to the U.S. dollar, or 99.41 U.S. cents, down from US$1.0068, valuing a U.S. dollar at 99.32 Canadian cents, at Wednesday's North American session close.
The fall in the Canadian dollar, after nearing a four-week high on Wednesday, immediately followed the U.S. report that showed weekly jobless claims were much higher than expected.
An economic slowdown in the United States would likely have a negative impact on Canada, which relies heavily on the U.S. market for consuming the bulk of its exports.
Getting lost in the shuffle was another piece of data that showed Canada's economic growth fell as expected to 0.1 percent in November from 0.2 percent in October.
"The initial jobless claims gave the market just enough reason to sell the Canadian dollar in an environment where they were looking for reasons to sell," said Matthew Strauss, senior currency strategist at RBC Capital Markets.
"The U.S. data has renewed fears that labor market weakness could push the U.S. economy into recession."
Strauss said the Canadian dollar's failure to close above a key level on Wednesday left it susceptible to a decline.
The fall in the Canadian dollar marked a sudden turnaround from the previous session when it rallied to US$1.0131, valuing a U.S. dollar at 98.71 Canadian cents, after the U.S. Federal Reserve cut its key lending rate and opened up the biggest rate spread in favor of the Canadian currency since June 2004.
U.S. interest rates are 1 percentage point lower than Canadian interest rates, which should make the Canadian dollar more attractive to investors versus the greenback.
Canadian bond prices were being supported by a rush of dealers who fled equities in favor of the security offered by government debt given the latest U.S. economic data.
U.S. claims for state insurance benefit jumped 69,000 to 375,000, which marked the largest weekly increase since September 2005. It was also enough to send equity markets to sharp losses early and boost bond prices.
"The move is due to the sharp back up in jobless claims," said Sal Guatieri, senior economist at BMO Capital Markets. "It's good for bond (prices) because it means the (U.S.) economy is still at risk of recession."
The overnight Canadian Libor rate was at 4.1483 percent, up from 4.1100 percent on Tuesday.
Wednesday's CORRA rate was 3.9978 percent, down from 4.0042 percent on Tuesday. The Bank of Canada publishes the previous day's rate at around 9:00 a.m. daily.
The two-year bond was up 11 Canadian cents at C$102.00 to yield 3.111 percent. The 10-year bond rose 47 Canadian cents to C$101.39 to yield 3.821 percent.
The yield spread between the two-year and 10-year bond was 71.0 basis points, up from 70.5 points at the previous close.
The 30-year bond increased 72 Canadian cents to C$114.35 to yield 4.149 percent. In the United States, the 30-year Treasury yielded 4.323 percent.
The three-month when-issued T-bill yielded 3.39 percent, unchanged from the previous close.
Reporting by Frank Pingue; Editing by Scott Anderson