September 21, 2011 / 7:29 PM / in 6 years

C$ hits weakest since December after Fed decision

TORONTO (Reuters) - The Canadian dollar sank past parity with its U.S. counterpart to touch its weakest level since December on Wednesday after the Federal Reserve ramped up efforts to aid the beleaguered U.S. economy.

The Fed embraced further monetary easing by extending the average maturity of its security holdings, announcing it intends to buy $400 billion in 6- to 30-year Treasuries by the end of June 2012.

The move is designed to put more downward pressure on long-term interest rates and help the battered U.S. housing sector. But investors focused on the Fed’s warning that “there are significant downside risks to the economic outlook.”

“The U.S. dollar is a buy on the news, from a safe-haven perspective. Ironically speaking, when the Fed sees ‘significant downside risk’ to its economic outlook and chooses to deliver Operation Twist,” said Jack Spitz, managing director of foreign exchange at National Bank Financial.

“Risk currencies are all off, even more than they were before the Fed announcement.”

The Canadian dollar ended the North American session at C$1.0059 to the U.S. dollar, or 99.41 U.S. cents. It hit low of C$1.0083 to the U.S. dollar, or 99.18 U.S. cents. That was the weakest reading for the Canadian currency since December 2010 and well off Tuesday’s North American close of C$0.9936 to the U.S. dollar, or $1.0064.

Financial markets registered a big jump in risk aversion after the Fed announcement, as U.S. stocks slid and benchmark Treasury yields hit a more than 60-year low.

The U.S. dollar rose broadly, reversing losses against the euro. <MKTS/GLOB>

Earlier in the session, Canadian data showed the annual inflation rate climbed to a higher than expected 3.1 percent in August, but analysts this was unlikely to worry the Bank of Canada, which is more concerned with fiscal problems in Europe and the United States.

The Canadian dollar had briefly strengthened as the inflation report cooled some market speculation that the Bank of Canada would cut interest rates.

The Fed announcement boosted long-dated U.S. Treasuries because the policy means the central bank will sell shorter-term notes and use those funds to buy longer-dated bonds.

Canadian long-term debt prices soared in concert.

The two-year Canadian government bond was down 0.5 Canadian cent to yield 0.944 percent, while the 10-year bond climbed 44 Canadian cents to yield 2.149 percent.

The yield on the 30-year bond sank to 2.771 percent, a low not reached in records going back to the 1970s.

Editing by Jeffrey Hodgson

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