April 25, 2008 / 1:53 PM / in 10 years

Canadian dollar clipped by rising U.S. dollar

TORONTO (Reuters) - The Canadian dollar fell against a rallying U.S. dollar on Friday, as investors bet the worst was over for the U.S. economy.

Domestic bond prices fell along with the bigger U.S. market as the more optimistic U.S. outlook took the shine off the safe-haven appeal of government debt.

At 9:20 a.m. (1320 GMT), the Canadian dollar was at C$1.0180 to the U.S. dollar, or 98.23 U.S. cents, down from C$1.0142 to the U.S. dollar, or 98.60 U.S. cents, at Thursday’s close.

While the Canadian dollar was down slightly against the greenback, it was up against most other major currencies.

“What stands out is that most currencies are diving against a generally very, very strong U.S. dollar today,” said Adam Cole, head currency strategist at RBC Capital Markets, in London.

“But Canada, I guess, as the markets perceive Canada as being a net winner from an improving U.S. economy, is being carried with the U.S. dollar.”

The U.S. absorbs more than three-quarters of Canadian exports.

The Bank of Canada said on Thursday it believes the U.S. economic slowdown will last longer than it had previously thought.

As a result, the central bank lowered its outlook for Canadian economic growth to 0.3 percent in the second quarter of this year from a previous estimate of 2 percent.

However, strong consumer confidence and the cumulative effect of 150 basis points of interest rate easing should help the Canadian economy recover, starting in the second half.

A Reuters poll on Thursday showed that 11 of 12 of Canada’s primary securities dealers expect another 25 basis point cut to the central bank’s key lending rate in June, with the dissenter looking for a 50 basis point cut. Most dealers see the Bank of Canada pausing its rate cutting campaign after that.

With no major Canadian data and no central bank announcements on tap, the currency will likely continue to trade along with the greenback, which will take its direction from equity markets, said Cole.

Investors have been looking to the stock markets as a barometer for the outlook of the U.S. economy.

BONDS FALL

Canadian bond prices fell along with the larger U.S. market, as more optimistic market sentiment lessened the safe-haven appeal of government debt.

“Across asset classes, the markets are consistent,” said James Dutkiewicz, who oversees about C$5 billion in fixed income assets in Toronto for CI Investments.

Dutkiewicz pointed to factors including moderate U.S. dollar strength, improving credit conditions, spreads narrowing on corporate bonds, government yield curves flattening, and rising stocks, as proof of the upturn in market sentiment.

“But I don’t agree with it,” he said, pointing to this week’s disappointing U.S. data on new home sales and inventories.

“People, including ourselves, were cautiously optimistic in the last two or three months that we were beginning to see some signs of stability... but if demand is collapsing at this level, then I don’t think that risky assets should outperform.”

The overnight Canadian LIBOR rate LIBOR01 was at 3.0500 percent, unchanged from Thursday.

Thursday’s CORRA rate CORRA= was 3.0354 percent, up from 3.0021 percent on Wednesday. The Bank of Canada publishes the previous day’s rate at around 9 a.m. daily.

The two-year bond fell 16 Canadian cents to C$101.60 to yield 2.957 percent. The 10-year bond dipped 24 Canadian cents to C$101.91 to yield 3.749 percent.

The yield spread between the two- and 10-year bonds was 79.2 basis points, down from 84.5 basis points at the previous close.

The 30-year bond shed 19 Canadian cents to C$113.26 to yield 4.205 percent. In the United States, the 30-year Treasury yielded 4.564 percent.

The three-month when-issued T-bill yielded 2.60 percent, up from 2.57 percent at the previous close.

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