August 5, 2008 / 2:06 PM / in 9 years

Canadian dollar nears 11-month low as oil slides

TORONTO (Reuters) - The Canadian dollar stumbled to its lowest level in nearly 11 months against the U.S. dollar on Tuesday as oil prices fell further from last month’s record and put more focus on slowing global growth.

Domestic bond prices, with no Canadian economic data to consider until later this week, were dragged lower along with the bigger U.S. Treasury market after the Federal Reserve held its fed funds target rate steady at 2 percent.

The Canadian dollar closed at C$1.0419 to the U.S. dollar, or 95.98 U.S. cents, down from C$1.0240 to the U.S. dollar, or 97.66 U.S. cents, at Friday’s close. The Bank of Canada did not provide a closing number for Monday because of a holiday.

Lower commodity prices, specifically oil, were behind the currency’s latest slide and could continue to be a drag on the Canadian dollar with no floor in sight.

From last November to the start of this week, the currency had managed to stick in a range where US$1 had been worth between C$1.0342 and 97.24 Canadian cents.

That range was busted wide open in Tuesday’s session as the Canadian dollar fell as low as C$1.0446 to the U.S. dollar, or 95.73 U.S. cents, which could force some experts to alter their forecasts for the currency.

“If this is a meaningful breakout after having traded in a tight range for so long, the risk is really that we’ll see slightly weaker Canadian dollar levels,” said Shaun Osborne, chief currency strategist at TD Securities.

“I‘m a little concerned that we’ve had close to three weeks straight (U.S.) dollar gains here and no sign of a correction. So it is perhaps, from our perspective, starting to look a little bit stretched.”

Canada is a key exporter of oil, but for most of 2008 the link between the Canadian dollar and oil prices was nowhere near as close as it was last year when high oil prices fueled the currency all year.

However there seems to have been something of a reconnection between the two in recent weeks as the currency has fallen and oil prices have dropped from a record high above $147 a barrel in mid-July to below $120 on Tuesday.

BOND PRICES SLIDE

Canadian bond prices ended lower across the curve on a rally in U.S. equity markets amid lower oil prices and an expected decision by the Fed to leave interest rates steady curbed appetite for more secure assets.

“You thought it should have provided a bit of a lift to the bond market, instead we had a bit of a selloff right across the board,” said Michael Gregory, senior economist at BMO Capital Markets.

“I think the greater worry perhaps here is supply, and that may be what’s casting the negative tone in the bond market, and of course that’s filtering across the border.”

Canadian data due this week includes the July Ivey Purchasing Managers Index on Wednesday, June building permits on Thursday and the influential July jobs numbers on Friday.

The two-year bond fell 3 Canadian cents to C$101.50 to yield 2.894 percent. The 10-year bond dipped 37 Canadian cents to C$104.51 to yield 3.697 percent.

The yield spread between the two-year and 10-year bond was 90.8 basis points, down from 92.5 basis points.

The 30-year bond fell 71 Canadian cents to C$115.04 for a yield of 4.105 percent. In the United States, the 30-year treasury yielded 4.648 percent.

The three-month when-issued T-bill yielded 2.54 percent, up from 2.44 percent at the previous close.

Editing by Rob Wilson

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