TORONTO (Reuters) - The Canadian dollar fell nearly 1 percent against a broadly stronger U.S. dollar on Thursday, heading into the Easter holiday weekend, as influential commodity prices continued to slide.
Domestic bond prices were mixed as hedge funds were forced to deleverage themselves to some extent due to tight credit conditions.
The Canadian dollar closed at C$1.0234 to the U.S. dollar, or 97.71 U.S. cents, down from C$1.0152 to the U.S. dollar, or 98.50 U.S. cents, at Wednesday's close.
For the week, the currency ended down 3.6 percent.
The slide in the Canadian dollar came along with a drop in commodity prices, many of which recently hit record highs.
Canada is a major producer of commodities such as crude oil and gold, and those prices can have a major influence on the currency.
The Reuters-Jefferies CRB index, which tracks the prices of 19 commodity futures, was down almost 10 percent on the week, the biggest drop on the index since at least 1956, said Camilla Sutton, currency strategist at Scotia Capital.
"Because of the violence of the move, it does seem like there are active players really taking off long positions very aggressively," Sutton said.
As credit has tightened in global markets, investors are paring back on profitable trades, especially commodities, to cover margins and losses.
Much of the liquidation of long commodity positions has been linked to the covering of short U.S. dollar positions.
That has led to broad-based U.S. dollar strength, especially against commodity-linked currencies like the Canadian dollar.
Canadian bond prices ended mixed and the curve flattened as the credit crisis moved to hedge funds, many of which were forced to deleverage themselves to pay back borrowed money.
"The next shoe has dropped," said Eric Lascelles, chief economics and rates strategist at TD Securities.
"Traditionally, banks have said you give me a dollar and I'll lend you 10 and you can do what you like with that, but as banks grow more conservative, they've been calling in that money from hedge funds, and hedge funds are being forced to some extent to unwind their positions."
People are buying the long end and selling the short end so they can unwind the reverse position and that is flattening out the curve, Lascelles said.
The two-year bond dipped 7 Canadian cents to C$102.77 to yield 2.559 percent. The 10-year bond fell 7 Canadian cents to C$104.31 to yield 3.447 percent.
The yield spread between the two- and 10-year bonds was 88.8 basis points, down from 91.8 points at the previous close.
The 30-year bond rose 3 Canadian cents to C$118.23 to yield 3.942 percent. In the United States, the 30-year treasury yielded 4.168 percent.
The three-month when-issued T-bill yielded 1.60 percent, down from 1.94 percent at the previous close.