* Canadian dollar rises 0.2 percent with stocks, oil
* Suffers worst yearly drop vs U.S. dollar in decades
* Bond prices slip in light activity
(Adds Bank of Canada official closing rate, updates 2008 drop
against U.S. dollar)
By Lynne Olver
TORONTO, Dec 31 (Reuters) - The Canadian dollar closed
slightly higher against the U.S. currency on Wednesday in
subdued pre-holiday trading, ending a volatile year on an up
note as market participants shifted their focus to 2009.
For the full year, the Canadian dollar posted its worst
annual drop in more than half a century as plunging commodity
prices in the second half of 2008 took their toll. But the
decline came on the heels of an unusually strong 2007
performance against the greenback.
Government bond prices closed lower on Wednesday but made
solid gains in 2008 as investors around the world shunned risk.
The bond market shut early ahead of the New Year's Day
The Canadian currency ended at C$1.2180 to the U.S. dollar,
or 82.10 U.S. cents, after a swift afternoon increase in crude
oil prices lifted Canadian stocks. That was up from Tuesday's
close of C$1.2210 to the U.S. dollar, or 81.90 U.S. cents.
With many market players still away for the holidays,
corporate flows drove most activity this week, traders and
"In essence, we're just executing business that has to be
done before the month-end," said Shaun Osborne, chief currency
strategist at TD Securities in Toronto.
By early afternoon, already-light flows had dwindled to a
"I think most market participants on the corporate side
have started vacating their offices," said Dave Bradley,
director of foreign exchange trading at Scotia Capital in
For the year, the Canadian dollar slumped 18.6 percent, its
worst annual showing against the U.S. dollar since at least
1950, although it did rise against other currencies.
Several analysts said further weakness is probably in store
for the currency in 2009's first quarter, given that a global
recession should hurt demand and prices for commodities. These
swings tend to affect the Canadian dollar due to the country's
hefty energy and materials exports.
But Osborne said he anticipates a broad-based decline in
the U.S. dollar next year. In his view, U.S. short-term
interest rates near zero, the recession, a U.S. budget deficit
and non-conventional monetary policy will weigh on the
greenback, possibly lifting the Canadian currency to C$1.15 to
the U.S. dollar by year-end.
The Canadian dollar was worth slightly more than its U.S.
counterpart at the start of 2008, after jumping 17.6 percent in
2007. But in the second half of 2008, credit markets worsened,
U.S. financial companies melted down, a global recession loomed
and commodity prices fell, taking the shine off the currency.
Still, the Canadian dollar outperformed sterling plus the
Australian and New Zealand currencies, Osborne noted.
Several events in January could influence the market,
including the Bank of Canada's interest rate decision on Jan.
20 and a federal budget on Jan. 27 that should contain an
economic stimulus package.
BONDS END LOWER
Domestic bond prices slipped in light trade, in tandem with
the U.S. Treasury market, capping a strong year for
"It has been a theme of flight to quality and flight away
from distressed assets," said Levente Mady, a broker at MF
Global in Vancouver, British Columbia, who specializes in
"The weaker the credit, the worse beating it took" in 2008,
But because price gains have pushed government bond yields
lower and lower, Mady is recommending that clients move into
higher-yielding products such as provincial government bonds
and select blue-chip corporate bonds.
The two-year Canada bond closed down 4 Canadian cents at
C$103.10 to yield 1.100 percent. The 10-year bond eased 25
Canadian cents to C$112.90, yielding 2.688 percent.
The yield spread between the two-year and 10-year bond was
159 basis points, versus 158 at the previous close.
The 30-year bond was down 95 Canadian cents at C$127.70 and
its yield was 3.460 percent. In the United States, the 30-year
treasury yielded 2.695 percent.
(Reporting by Lynne Olver; editing by Rob Wilson)