The Canadian dollar suffered its biggest weekly decline in at least 38 years against its U.S. counterpart this week as the passage by Congress of the $700 billion (U.S.) rescue package failed to persuade investors that the worst of the financial crisis was over.

Canadian bond prices rose and yields fell as fears of a global recession had many in the market betting that central banks would soon be cutting interest rates to spur growth.

The loonie closed at $1.0815 to the U.S. dollar, or 92.46, (U.S.) down from $1.0799 to the greenback, or 92.60 at Thursday's close.

Canada's currency ended the week down 4.5 per cent against the U.S. dollar, its biggest one-week drop since at least 1970. Early in the session it touched a 13-month low, but regained some ground after the passage of the rescue package for the besieged U.S. financial sector.

As financial institutions in the United States and Europe have collapsed in response to bursting real estate bubbles and murky assets, lenders have responded by hoarding cash and U.S. dollars have become scarce, driving up their value.

Once the U.S. economic rescue package was passed, traders focused their attention back on world economies.

"We're getting economic numbers in the U.S. which are dismal, and that, I think, removes any debate about whether there will be a recession in the U.S ... and there's a significant risk of a global recession," said David Watt, senior currency strategist at RBC Capital Markets.

U.S. payrolls plunged in September at the steepest rate in five years as employers cut 159,000 non-farm jobs from their payrolls, the U.S. Labor Department said yesterday. Analysts had expected a loss of 100,000 jobs.

Weakening commodity prices have also weighed heavily on Canada's dollar, with around half of Canadian exports made up of natural resources.

"Commodity price measures are not just back to levels of a year ago, but all the way back to levels prevailing in late 2005, and the sell-off is taking no prisoners," said Doug Porter, deputy chief economist at BMO Capital Markets. "

"A darkening global growth outlook and a rejuvenated U.S. dollar – which had its best week in years – have both pounded on resource prices."

Carlos Leitao, chief economist at Laurentian Bank of Canada, said the market expects central banks, the U.S. Federal Reserve and the Bank of Canada included, will start cutting rates in the near term to try to spur growth. Bond yields, which move inversely to prices, fell to reflect those expectations of lower rates.

Early in the session, the Bank of Canada moved to increase confidence in the Canadian markets by upping the amount it plans to inject into markets through Purchase and Resale Agreements to $20 billion from a previously announced $8 billion to help improve liquidity in the financial system.

The two-year bond rose 20 cents to $100.52 (Canadian) to yield 2.500 per cent. The 10-year bond gained 50 cents to $105.40 to yield 3.582 per cent.

The yield spread between the two-year and the 10-year bond rose to 115 basis points from 105 basis points. The 30-year bond added 85 cents to $115.15 for a yield of 4.095 per cent. In the United States, the 30-year Treasury yielded 4.094 per cent

Reuters News Agency