Wed Nov 28, 2007 5:55pm EST
TORONTO, Nov 28 (Reuters) - The Canadian dollar rallied 0.9 percent against the U.S. dollar on Wednesday, a day after dropping to parity, after comments from a U.S. Federal Reserve official and some weak U.S. economic data suggested the Fed will cut interest rates in December.
Bond prices, with no Canadian data to consider, fell as investors turned away from the safety of government debt to look for deals in the equities markets.
The Canadian dollar closed at US$1.0140, valuing each U.S. dollar at 98.61 Canadian cents, up from US$1.0050, or 99.50 Canadian cents, at Tuesday's session close.
Comments by Fed Vice Chairman Donald Kohn that market turmoil could slow the U.S. economy quicker than thought made investors bet the Fed would cut rates at its next meeting.
Kohn's comments were backed up by the release of the Fed's Beige Book, which said the U.S. economy grew more slowly in October to mid-November than in the previous period.
The weaker greenback helped spur a rally in the Canadian dollar, which had fallen 9 percent against the greenback in a matter of weeks.
"I think Canada probably corrected a little too far too fast, the same way it was rising too far too fast," said Steve Butler, director of foreign exchange trading at Scotia Capital.
The Canadian dollar shot to a modern-day high of US$1.1039 on Nov. 7, but a variety of factors, including weak domestic economic data, an equity-market selloff and growing talk of a Bank of Canada rate cut pushed the currency back to parity.
The bounce in the commodities-based currency came even as oil and gold prices fell. And while the U.S. dollar was under siege due to expectations of a rate cut by the Federal Reserve, the Canadian unit also performed well against the major crosses such as the yen, the euro and the British pound.
The Canadian dollar often does well when the market has an appetite for risk, as the massive rally in equities suggests it did on Wednesday, but it is too soon say whether the current mood will last, Butler said.
"I think we have to let the dust settle and maybe take a look at it in the next day or two and then we'll really figure out whether or not Canada is back in favor again."
Markets have been extremely volatile lately, as the hangover from August's credit crunch and the U.S. subprime mortgage crisis continues to give investors one big collective headache.
An announcement on Tuesday that Citigroup, the largest U.S. bank, was getting an infusion of capital to the tune of $7.5 billion from the Abu Dhabi government helped soothe investors' nerves.
Upcoming economic data this week, including third-quarter gross domestic product numbers on Friday, may help give the Canadian dollar a more definite direction leading into a Bank of Canada interest rate decision on Tuesday.
The market has been divided on whether the bank will cut its key overnight rate by 25 basis points. A lower interest rate would generally make the Canadian dollar less attractive to investors, but it could make the country's exports more competitive.
The central bank's key rate is at 4.50 percent.
BONDS TUMBLE
Canadian bond prices tilted lower as investors flocked to equities markets after a recent selloff.
"The reality is both markets were due for a correction, and they've both corrected, stocks to the upside and bonds to the downside," said Robert Marcus, president and chief investment officer at Majorica Asset Management Inc.
In Canada, third-quarter current account surplus, producer prices, and raw materials data will be released on Thursday and the GDP figures on Friday.
The two-year bond fell 22 Canadian cents to C$100.92 to yield 3.765 percent. The 10-year bond dropped 50 Canadian cents to C$99.47 to yield 4.068 percent.
The yield spread between the two-year and 10-year bond moved to 30.3 basis points, from 33.5 basis points at the previous close.
The 30-year bond lost 38 Canadian cents to C$113.15 to yield 4.217 percent. In the United States, the 30-year Treasury yielded 4.433 percent.
The three-month when-issued T-bill yielded 3.93 percent unchanged from the previous close. (john.mccrank@reuters.com; +1 416 941 8083; Reuters Messaging: john.mccrank.reuters.com@reuters.net))
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