CANADA FX DEBT-C$ strengthens for 4th day, bonds mixed

* C$ pushes to 89.38 US cents, highest level since Oct. 9

* Bonds mixed as currency gains, downgrade talk mounts (Adds details)

TORONTO, May 22 (Reuters) - The Canadian dollar rose for a fourth straight session and hit a new seven-month high versus the U.S. dollar on Friday, spurred by market worries about the triple-A credit ratings of the United States.

The Canadian currency pushed as high as C$1.1188 to the U.S. dollar, or 89.38 U.S. cents, its strongest level since Oct. 9. It is up about 17 percent since hitting its lowest level in about five years in early March.

It finished at C$1.1203 to the U.S. dollar, or 89.26 U.S. cents, up sharply from C$1.1380 to the U.S. dollar, or 87.87 U.S. cents, at Thursday’s close.

The ratings concern was sparked by a Standard & Poor’s downward revision this week to its credit rating outlook for the United Kingdom, feeding jitters that Washington’s growing deficit could lead to a similar fate for the United States. [ID:nLL180301]

Fears of a ratings cut hit U.S. assets on Thursday and continued into Friday. Moody’s Investors Service said it is comfortable with its triple-A rating on the United States but said the sovereign rating is not guaranteed forever. [ID:nN21313143] Stocks managed to rebound on the comments, but the U.S. dollar and bonds remained under pressure. [MKTS/GLOB]

“It just seems the market right now has gone into this mode to sell U.S.,” said George Davis, chief technical strategist at RBC Capital Markets.

By comparison, Canada’s fiscal and economic picture is relatively healthy, making the currency seem a better bet than its U.S. counterpart.

“Even though we’re in a recession, even though we have seen our surplus gradually erode, I think on a relative basis ... we’re certainly in a better position than the U.S. is, which makes the Canadian dollar look that much more attractive,” Davis said.

The currency also drew support from an International Monetary Fund review that said Canada’s strong policy framework and proactive response to the recession put it in a better position to deal with the global financial crisis than most countries. But the IMF also said that the near-term economic outlook for Canada is challenging. [ID:nWEQ001034]

The Canadian dollar largely shrugged off data that showed Canadian retail sales rose for a third straight month in March. [ID:nN21314203]

Currency markets are likely to be quiet, and the Canadian dollar may be prone to large swings, on Monday when the U.S. and British financial markets are closed for holidays.


Canadian bonds were mixed as the short end dipped with firmer equity markets, while the long end rose in contrast to U.S. Treasuries, which came under intense pressure from talk of a U.S. credit rating downgrade.

Canadian bonds mostly outperformed their U.S. counterparts, particularly in the long end, where the 30-year bond yield was about 41.8 basis points below the U.S. 30-year yield, compared with about 34 basis points on Thursday.

“I think the big story here is the relative outperformance of Canada versus the U.S.,” said Doug Porter, deputy chief economist at BMO Capital Markets.

“I think the strength of the currency has probably helped protect the market a bit today,” he said.

The benchmark two-year government bond dipped 2 Canadian cents to C$100.18 to yield 1.159 percent, while the 10-year bond rose 8 Canadian cents to C$104.16 to yield 3.26 percent.

The 30-year bond gained 30 Canadian cents to C$117.40 to yield 3.966 percent. The U.S. 30-year yield was 4.384 percent. (Editing by Peter Galloway)