January 16, 2008 / 1:55 PM / in 10 years

Dollar skids to 4-month low

TORONTO (Reuters) - The Canadian dollar fell to a 4-month low versus the U.S. dollar on Wednesday morning as concerns about a global economic slowdown rattled global stock markets and took the domestic currency along for the ride.

Domestic bond prices rose across the curve as fears of a U.S. recession convinced investors to bail out of risky investments in favor of secure assets like government debt.

At 8:35 a.m. EST , the Canadian unit was at 97.78 U.S. cents, valuing a U.S. dollar at C$1.0227, down from 98.37 U.S. cents, or C$1.0166, at Tuesday’s close.

The Canadian dollar dropped to 97.24 U.S. cents overnight amid concerns about a possible U.S. recession, the impact that could have on the global economy and how that could sap demand for Canada’s key commodity exports.

“The fear of a U.S. recession is one thing, but fears that it could go global is something else since Canada has been so dependent on commodity prices for so long,” said David Watt, senior currency strategist at RBC Capital Markets.

Watt also said the Canadian dollar, whose performance was largely influenced by oil and gold prices as it rose last year, had become more closely linked with equity markets in 2008.

Equity markets have been under pressure since the start of the new year, weighed down largely by U.S. economic concerns and weak corporate earnings.

The Canadian dollar is down 3.2 percent in 2008 following a banner year in 2007 when it soared 17.5 percent against the greenback and topped parity for the first time since 1976.

With no domestic data due to influence direction on Wednesday, the Canadian dollar could be in for another rough session, with equity markets poised for further losses.

The Bank of Canada will set monetary policy on January 22 and the market has largely priced in a 25-basis-point cut, which would bring the overnight rate down to 4.00 percent.

BONDS RISE

Bond prices extended recent gains as investors raced out of equity markets in favor of the safe haven investment typically offered by government debt.

Two-year and 10-year bond yields have been at September 2005 levels since the end of last week, but they are still underperforming their U.S. counterparts.

The overnight Canadian Libor rate was at 4.2900, percent, down from 4.3250 percent on Tuesday.

The two-year bond was up 1 Canadian cent at C$101.84 to yield 3.223 percent. The 10-year bond gained 15 Canadian cents to C$101.86 to yield 3.762 percent.

The yield spread between the two-year and 10-year bond was 54.1 basis points, down from 54.4 at the previous close.

The 30-year bond was up 22 Canadian cents at C$116.83 to yield 4.018 percent. In the United States, the 30-year treasury yielded 4.264 percent.

The three-month when-issued T-bill yielded 3.61 percent, down from 3.62 percent at the previous close.

Editing by Bernadette Baum

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