CANADA FX DEBT-C$ slides to weakest since March, parity in sight

* Drops to C$0.9909 to the US$, or $1.0092

* Touches weakest since March 17, traders eye US$ parity

* Bond prices jump as investors continue to exit risk

TORONTO, Aug 8 (Reuters) - Canada’s dollar dropped more than a cent to a near five-month low against the U.S. currency on Monday, on rising fears of a U.S. recession exacerbated by the United States’ loss of its triple-A credit rating.

The currency was caught up in a wave of selling that saw U.S. stocks plunge more than 6 percent as investors fled to the safety of gold and bonds. [MKTS/GLOB]

And analysts warned falling equity markets and energy prices could drive the commodity-linked Canadian currency even lower in the week ahead, perhaps even to equal footing with the U.S. greenback.

The Canadian and U.S. currencies were last equal in February.

“If there are continued moves such as we’ve seen in every other asset class, parity here we come by week-end,” said C.J. Gavsie, managing director of foreign exchange sales at BMO Capital Markets.

“In addition to the stock markets, there is a lot of pressure from the oil side, and that decline has had and continues to have tremendous pressure on the Canadian dollar,” Gavsie said.

The price of oil, a key Canadian export, dropped more than 5 percent to $81.31 a barrel a barrel. [O/R]

The Canadian dollar CAD=D4 closed the session at C$0.9909 to the U.S. dollar, or $1.0092, having regained some ground since hitting C$0.9930, or C$1.0070, earlier in the day. That was its lowest level since March 17.

The day’s close was well below Friday’s North American session close at C$0.9781 to the U.S. dollar, or $1.0224.

“A number of important benchmark markets around the world are in bear market territory now ... so this is an environment where risk aversion is probably going to persist,” said Shaun Osborne, chief currency strategist at TD Securities.

“In that kind of environment we would expect the Canadian dollar to continue underperforming.”

The Canadian dollar, which was within striking distance of hitting a modern-day high not even a month ago, has lost more than 5 cents since late July, swept up in the global sell-off of riskier assets. [ID:nN1E76K0DV]

Equity markets dropped on Monday in the third day of fevered selling.

The Dow Jones Industrial Average closed down 5.6 percent, while the S&P 500 was down 6.7 percent and the Nasdaq lost 6.9 percent. [.N]

Losses in Toronto were only slightly less pronounced, with the Toronto Stock Exchange's S&P/TSX composite index .GSPTSE down 4.04 percent. [.TO]

Deep-rooted jitters after Standard & Poor’s cut the U.S. debt rating from its top-notch level on Friday sent world stocks towards their lowest point in a year, overshadowing relief that the European Central Bank was buying bonds of euro zone strugglers Italy and Spain.

Uncertainty over economic growth in the United States is a major factor putting pressure on the Canadian dollar, the U.S. being Canada’s biggest trading partner.

“Canada still has a number of safe-haven elements to it, but so long as you’ve got intense uncertainty about the U.S. and global growth outlooks, they’re not necessarily going to shine through,” David Watt, senior currency strategist at RBC Capital Markets.

Government bonds pushed sharply higher, shaking off the S&P downgrade as stocks bore the brunt of the flight from risk.

Canada's two-year bond CA2YT=RR jumped 50 Canadian cents to yield 0.813 percent, while the 10-year bond CA10YT=RR climbed C$1.37 cents to yield 2.487 percent.

Canadian government bonds outperformed short- and medium-term U.S. Treasuries following the downgrade. But a surge in safe-have demand for long-term U.S. debt on jitters about the economy meant Canada underperformed at the long end. (Editing by Jeffrey Hodgson)