June 13, 2008 / 8:46 PM / in 9 years

Canadian dollar flags for third week as US$ gains

* C$ slips 0.6 pct as US$ rises on inflation worries

* Currency sags 1 pct on week; down 3 straight weeks

* Bond prices mostly lower as higher equities weigh

By John McCrank

TORONTO, June 13 (Reuters) - The Canadian dollar fell for the second straight day against the U.S. dollar on Friday, as talk of rising inflation and higher U.S. interest rates strengthened the greenback.

Canadian bond prices ended mostly lower as strong performances in the equities markets lessened the safe haven appeal of government debt.

The Canadian dollar closed at C$1.0292 to the U.S. dollar, or 97.16 U.S. cents, down from C$1.0232 to the U.S. dollar, or 97.73 U.S. cents, at Thursday’s close.

For the week, the Canadian currency ended down 1 percent against the U.S. dollar, after slumping 2.6 percent last week, and 0.5 percent the week before.

“Given the focus the global monetary authorities appear to have on the U.S. dollar -- they’d like it a little bit higher, and they’d like commodities a little bit lower -- in that kind of an environment, it’s probably going to be a little bit of a tough slope for the commodity currencies in the next little while,” said Shaun Osborne, chief currency strategist at TD Securities.

Canada is a major oil exporter and its currency is often influenced by moves in the commodity.

The greenback recorded its best week against a basket of major currencies in over three years as U.S. Federal Reserve officials repeatedly said that inflation is a concern and a weaker U.S. dollar does not help.

That supported expectations that the next monetary policy move the Fed makes will be an interest rate hike.

“I suspect that from a medium term point of view, we are going to continue to see the (U.S.) dollar to appreciate,” said Osborne. He said he expects the Canadian dollar to trade in a range of C$1.0150 to C$1.0350 in the days ahead.

Domestic data released Friday showed Canadian labor productivity declined 0.3 percent in the first quarter, due to a drop in manufacturing output, fewer working hours and bad weather.

Other data showed higher prices and production in the petroleum products industry helped drive up Canadian manufacturing sales by a stronger-than-expected 2 percent in April from March.

BONDS PRICES MOSTLY LOWER

Canadian bond prices were mostly lower as investors shifted some assets to rallying equity markets, said Mark Chandler, fixed income strategist

The yield on the Canadian two-year bond for the week, up 51 basis points, rose the most since the third week in March 2002, when its yield rose 64.7 basis points, according to Reuters EcoWin.

The move was helped by the Bank of Canada’s surprise decision to leave its key lending rate steady at 3.00 percent, stymieing market expectations of a 25 basis point cut.

“It’s also because of the way the central banks are all speaking from one voice with the threat sort of coordinated rate hikes, potentially, if we continue to see higher energy prices feeding into wages and so on,” said Chandler.

The two-year bond climbed 4 Canadian cents to C$100.69 to yield 3.384 percent. The 10-year bond fell 15 Canadian cents to C$100.77 to yield 3.897 percent.

The yield spread between the two-year and 10-year bond was 51.3 basis points, down from 47.9 at the previous close.

The 30-year bond slid 28 Canadian cents to C$113.00 for a yield of 4.218 percent. In the United States, the 30-year Treasury yielded 4.796 percent.

The three-month when-issued T-bill yielded 2.81 percent, up from 2.80 percent at the previous close. ($1=$1.03 Canadian) (Reporting by John McCrank; Editing by Frank McGurty)

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