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TORONTO, Jan 31 (Reuters) - The Canadian dollar tumbled back below parity with the greenback on Thursday on fears the United States, by far Canada's biggest trading partner, is teetering on the brink of a recession.
Domestic bond prices finished nearly flat, reversing an earlier rally, after assurances from a major U.S. bond insurer about the state of its business calmed jittery nerves.
The Canadian dollar closed at C$1.0038 to the U.S. dollar, or 99.62 U.S. cents, down from US$1.0068, valuing a U.S. dollar at 99.32 Canadian cents, at Wednesday's close.
Despite recent market volatility, the Canadian dollar ended down just 0.7 percent for the month of January.
"Until we have a real catalyst that breaks us out of there, I think we're really kind of stuck hovering on either side of parity, while making these really big intraday moves," said Camilla Sutton, a currency analyst at Scotia Capital.
"We're seeing that same story with the tug-of-war between global growth concerns and a weak U.S. dollar and how that plays out for the Canadian dollar."
The Canadian currency began the session above parity with the greenback, which lost some favor with investors after the U.S. Federal Reserve cut it's key lending rate by half a percentage point on Wednesday.
But the Canadian currency lost ground after a U.S. report showed weekly jobless claims were much higher than expected, stoking U.S. recession fears and putting pressure on the Canadian currency.
A recession in the United States would undoubtedly have a negative impact on Canada, which sends the bulk of its exports to the United States.
Meanwhile, a piece of domestic data showing Canada's economic growth fell, as expected, to 0.1 percent in November from 0.2 percent in October was largely overlooked.
On the mergers and acquisition front, IBM Corp (IBM.N) said it received Canadian government approval of its acquisition of Ottawa-based software maker Cognos Inc. CSN.TO.
"That could be an interesting Canadian dollar story in the next 24 hours as the market digests it and tries to interpret what it would mean for currency markets overall," said Sutton.
Cognos shareholders approved IBM's $5 billion takeover offer earlier in the month.
Bond prices rallied early in the session on U.S. economic concerns, but then gave up most of their gains to finish nearly flat.
"The selloff that occurred later in the session was basically just movement alongside (U.S.) Treasuries, given the fact that bond insurers look to be a little bit more stable than previously expected," said Max Clarke, economist at IDEAglobal in New York.
Leading U.S. bond insurer MBIA Inc (MBI.N) said it had enough cash to guarantee payments on corporate and municipal bonds and that it would be able to maintain its triple-A rating.
Speculation over possible downgrades to the credit ratings of U.S. bond insurers has battered equities markets in recent sessions.
The key piece of data scheduled for Friday will be the U.S. January jobs report, which could give some insight into the severity of the U.S. economic downturn, said Clarke.
The two-year bond dipped 2 Canadian cents to C$101.87 to yield 3.180 percent. The 10-year bond rose 2 Canadian cents to C$100.94 to yield 3.878 percent.
The yield spread between the two- and 10-year bond was 69.8 basis points, down from 70.5 points at the previous close.
The 30-year bond rose 16 Canadian cents to C$113.79 to yield 4.179 percent. In the United States, the 30-year Treasury yielded 4.324 percent.
The three-month when-issued T-bill yielded 3.39 percent, unchanged from the previous close.