TORONTO (Reuters) - The Canadian dollar was higher on Monday as prices for oil, a key Canadian export, rose while a more optimistic tone in the market took the shine off the U.S. dollar's safe-haven status.
Canadian bond prices were down across the curve as news that the U.S. government stepped in to prevent the collapse of the world's largest banking group prompted demand for recently beaten down equities.
At 10:10 a.m. (1510 GMT), the Canadian unit was at C$1.2542 to the U.S. dollar, or 79.73 U.S. cents, up from C$1.2772 to the U.S. dollar, or 78.30 U.S. cents, at Friday's close.
A North American equity market rally after news that the U.S. government said it would bail out Citigroup by agreeing to shoulder most of the bank's potential losses sparked a renewed bid for riskier assets.
The Canadian currency has been closely following moves in equity markets, where a string of losses had prompted a slew of risk-averse investors to embrace the greenback.
"We started off with a little bit of an optimistic tone and I think that's buoyed global prospects and provided a little bit of a lift for the Canadian dollar," said Michael Gregory, senior economist at BMO Capital Markets.
"But while the optimism may run for a day or two, the fact of the matter is things are falling off quite sharply."
Also offering support to the Canadian dollar was a rise in oil prices by more than a dollar a barrel given the prospect of a further OPEC supply cut.
But talk of a global recession, which would likely crimp demand for the bulk of Canada's exports, kept the rally in the currency in check.
Canadian Finance Minister Jim Flaherty said in an interview with CTV television on Sunday that the global financial crisis may have pushed Canada's economy into a "technical" recession, the first time he has conceded that possibility.
Data that showed consumer confidence in Canada dropped further in November to a fresh 26-year low as global economic turmoil intensified had a momentary drag on the currency.
Canadian bond prices turned lower across the curve, largely in line with the bigger U.S. Treasury market, as the Citigroup rescue gave some relief to investors and left little interest for more secure government debt.
"People are a little more upbeat and (there is) a little bit less risk worry, so bonds have giving back a little bit of the hefty gains they scored last week. ," Gregory said.
But persistent fears about the unfolding credit crisis and the slowdown in the global economy cushioned the slide in bond prices.
The Canadian overnight Libor rate was 2.3166 percent, down from 2.4833 percent on Friday.
Friday's CORRA rate was 2.2430 percent, down slightly from 2.2437 percent on Thursday. The Bank of Canada publishes the previous day's rate at around 9 a.m. daily.
The two-year bond eased 6 Canadian cents to C$101.80 to yield 1.841 percent. The 10-year bond slid 12 Canadian cents to C$106.18 to yield 3.480 percent.
The yield spread between the two-year and 10-year bond was 166 basis points, down from 169 at the previous close.
The 30-year bond shed 15 Canadian cents to C$115.95 to yield 4.051 percent. In the United States, the 30-year Treasury yielded 3.736 percent.
Reporting by Frank Pingue; Editing by Peter Galloway