TORONTO (Reuters) - The Canadian dollar rode record oil prices to a higher close against a besieged U.S. dollar on Wednesday, but concerns about Canada's reliance on the teetering U.S. economy limited the currency's gains.
Bond prices, with no domestic data to consider, rose across the curve as investors pondered the economic implications of $110 oil.
The Canadian dollar closed at US$1.0099, valuing a U.S. dollar at 99.02 Canadian cents, up from US$1.0067, valuing a U.S. dollar at 99.33 Canadian cents, at Tuesday's close.
During the overseas session the Canadian currency rose to US$1.0167 its highest level since March 7, valuing a U.S. dollar at 98.36 Canadian cents.
U.S. crude prices climbed to a record $110.20 a barrel, giving support to the commodity-linked Canadian dollar.
As the day wore on, however, investors began to shy away from the currency due to the Canada's tight economic ties with the United States, said Camilla Sutton, currency strategist at Scotia Capital.
The United States absorbs more than three quarters of Canadian exports and the two countries share the world's largest trading relationship.
The U.S. has been in an economic downturn for several months now, as the crisis in its subprime mortgage sector spread to the broader economy, and hammered credit markets world wide.
The U.S. Federal Reserve tried to address the credit market problems in a co-ordinated move with other central banks on Tuesday, by making hundreds of billions of dollars available to market players to increase liquidity.
While the efforts were initially applauded by investors, the optimism about the plan's long-term effectiveness turned to doubt on Wednesday, knocking the greenback to a record low against a basket of major currencies.
The softness in the U.S. currency was also seen prompting investors to buy crude oil as a hedge against an economic slowdown. Ironically, the record-high crude prices are expected to add even more pressure to the U.S. economy.
Canadian bond prices rose, reversing some of their losses from the previous session as doubts about the central banks' latest liquidity measures increased.
The record high oil prices were also partly responsible for the higher bond prices, said Max Clarke, an economist at IDEAglobal in New York.
"For the most part, it (oil) does provide general sluggishness in the American economy and that puts upward pressure on bonds."
Looking forward, Bank of Canada Governor Mark Carney is scheduled to speak about financial market turbulence on Thursday to the Toronto Board of Trade.
The speech will be followed by a news conference where Carney could offer insight into the central bank's 50-basis-point rate cut last week, which brought the key overnight rate down to 3.50 percent.
The two-year bond was up 10 Canadian cents at C$102.74 to yield 2.604 percent. The 10-year bond rose 54 Canadian cents to C$103.78 to yield 3.515 percent.
The yield spread between the two- and 10-year bond was 91.1 basis points, up from 90.7 points at the previous close.
The 30-year bond increased 81 Canadian cents to C$116.76 to yield 4.019 percent. In the United States, the 30-year treasury yielded 4.406 percent.
The three-month when-issued T-bill yielded 3.20 percent, up sharply from 2.35 percent at the previous close.