TORONTO (Reuters) - The Canadian dollar fell on Friday to its weakest against the U.S. dollar since September 2004 as equities markets fell sharply on a growing conviction that a global recession is inevitable, sending investors to the greenback in a safe-haven play.
Domestic bond prices rallied as the plunge in stocks increased the demand for relatively stable government debt.
At 8:58 a.m. EDT, the Canadian dollar was down 1 percent against the U.S. dollar at C$1.2687, or 78.82 U.S. cents, from C$1.2557 to the U.S. dollar, or 79.64 U.S. cents, at Thursday's close.
The currency fell as low as C$1.2848 to the U.S. dollar, or 77.83 U.S. cents, its lowest since September 2004.
"Right now there's absolute panic in the market again as the stock markets have come in so sharply lower," said Eric Lascelles, chief economics and rates strategist at TD Securities.
"I think people are just flighting to the safety play, which is the U.S. dollar."
Overseas stock markets took steep losses and U.S. equity futures fell so sharply that they had to be frozen at several points as traders worried a global recession was at hand.
In the overseas session, data showed the British economy contracted for the first time in 16 years in the third quarter, fanning fears of a global recession.
That sent foreign exchange investors away from the Canadian dollar, as demand for the natural resources Canada exports was seen falling off.
The currency has tumbled more than 20 percent so far this year against the greenback.
"The Canadian dollar is unbelievably weak," said Ian Nakamoto, director of research at MacDougall MacDougall and MacTier. "The only solace we can take is that all currencies around the world are weak except for the yen against the U.S. dollar."
Bond prices were higher across the curve as investors looked for a safe place to park their cash while waiting for the dust to settle in the equity markets.
"It's just a question of seeing how big the declines (on the stock markets) are going to be... and whether we end up going further as the day progresses or you get some buying at the bottom," said Mark Chandler, fixed income strategist at RBC Capital Markets.
On the data front, Canada's annual inflation rate began to descend from a five-year high in September, as prices fell for cars, clothing and computers.
The data was mostly on par with market expectations.
The Canadian overnight Libor rate was 2.2500 percent, unchanged from Thursday.
Thursday's CORRA rate was 2.2622 percent, up from 2.252 6 percent on Wednesday. The Bank of Canada publishes the previous day's rate at around 9 a.m. daily.
The two-year bond rose 23 Canadian cents to C$101.50 to yield 2.014 percent. The 10-year bond gained 53 Canadian cents to C$105.45 to yield 3.573 percent.
The yield spread between the two-year and the 10-year bond moved to 169 basis points from 159 at the previous close.
The 30-year bond added C$1.22 to C$115.97 to yield 4.051 percent. In the United States, the 30-year treasury yielded 3.921 percent.
Reporting by John McCrank; Editing by Frank McGurty