January 22, 2008 / 1:11 PM / in 10 years

Dollar dips ahead of Bank of Canada rate decision

TORONTO (Reuters) - The Canadian dollar fell against the U.S. dollar on Tuesday, driven lower by concerns about a possible global economic slowdown and talk of a bigger-than-expected Bank of Canada interest rate cut.

<p>A Canadian one dollar coin, also know as a loonie, is shown in Montreal, April 28, 2006. The Canadian dollar fell against the U.S. dollar on Tuesday, driven lower by concerns about a possible global economic slowdown and talk of a bigger-than-expected Bank of Canada interest rate cut. REUTERS/Shaun Best</p>

Domestic bond prices rose across the curve as investors fled risky investments like stocks in favor of more secure assets like government debt.

At 7:50 a.m., the Canadian dollar was at C$1.0334 to the U.S. dollar, or 96.77 U.S. cents, down from C$1.0329 to the U.S. dollar, or 96.81 U.S. cents at Monday’s close.

The Canadian currency touched a four-month low of 96.34 U.S. cents overnight, building on Monday’s losses and setting the stage for a fourth straight week of declines versus the greenback.

The Canadian dollar has fallen on fears of a U.S. recession that could spill over to hit the global economy. Those concerns have triggered sharp declines in equity markets around the world -- Canadian stocks were down 4.75 percent on Monday -- and darkened the outlook for exports.

The sharp tumble in equity markets sparked talk that the Bank of Canada could cut interest rates by 50 basis points at its 9 a.m. announcement, instead of the 25 basis points all 12 Canadian primary dealers predicted in a Reuters poll last week.

“Generally what you’ve seen over the last 12 hours or so is a rush to safety into more traditional safe-haven currencies like the Japanese yen and Swiss franc,” said Russell Jones, head of fixed income at RBC Capital Markets in London.

“The Canadian dollar has been sold ... in part reflecting expectations that there will be an ease in monetary policy and if anything it could go beyond the 25 basis points which has been priced in for some time.”

The dollar’s 4 percent slide so far this month comes on the heels of a banner year in 2007 when the currency shot up 17.5 percent versus the greenback on factors higher commodity, foreign takeovers of Canadian firms and a strong domestic economy.

<p>A Canadian one dollar coin, also know as a loonie, is shown in Montreal, April 28, 2006. The Canadian dollar fell against the U.S. dollar on Tuesday, driven lower by concerns about a possible global economic slowdown and talk of a bigger-than-expected Bank of Canada interest rate cut. REUTERS/Shaun Best</p>

But recent domestic economic data reports have consistently come in fall below expectations, and commodity prices have backed off the record highs reached earlier in the year.

BONDS RALLY

Bond prices were comfortably higher as investors sought the comfort and security offered by government debt given the sudden carnage in global stock markets.

And with talk of a bigger-than-expected 50-basis cut by the Bank of Canada on Tuesday, coupled with chatter that the Fed could lower rates ahead of its scheduled meeting next week, bond prices look well positioned for more gains.

“I would think (a 50 basis point cut is) at play and the possibility that the Fed will move inter-meeting,” said Sal Guatieri, senior economist at BMO Capital Markets. “And it looks like U.S. stocks will take a bath today.”

The overnight Canadian Libor rate LIBOR01 was at 4.0900, percent, down from 4.2817 percent on Monday.

The two-year bond was up 7 cents at C$102.14 to yield 3.053 percent. The 10-year bond rose 34 cents to C$102.33 to yield 3.702 percent.

The yield spread between the two-year and 10-year bond was 64.9 basis points, up from 65.2 basis points at the previous close.

The 30-year bond increased 30 cents to C$116.20 to yield 4.051 percent. In the United States, the 30-year Treasury yielded 4.209 percent.

The three-month when-issued T-bill yielded 3.50 percent, down from 3.54 percent at the previous close.

Editing by Janet Guttsman

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