July 29 (Bloomberg) -- The Canadian dollar dropped to a six-week low as crude oil traded near a two-month low, increasing concern that weakening commodity prices are signaling slowing economic growth.

The currency slumped for a sixth consecutive day as crude oil touched $120.42 a barrel. Oil has dropped 18 percent since hitting a record high of $147.27 a barrel on July 11. Alberta has the largest crude reserves outside the Middle East and commodities account for about half of Canada's exports.

``The Canadian dollar has underperformed,'' said Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto. ``It's a reflection of the oil prices coming off. That's taken a bit of the edge off the currency. Canada is emulating the softness we see in the commodity currencies overall.''

Canada's dollar dropped 0.1 percent to C$1.0240 per U.S. dollar at 4:42 p.m. in Toronto, from C$1.0226 yesterday. The currency touched C$1.0273, the weakest since June 16. One Canadian dollar buys 97.65 U.S. cents.

The loonie, as the currency is known because of the bird on the one-dollar coin, had traded near parity with the U.S. currency since September on speculation the Canadian economy might escape the economic downturn faced by the U.S. Now forecasters are looking for a reversal. The Canadian dollar will decline to C$1.07 by the first quarter of 2009, according to the median forecast of 29 analysts surveyed by Bloomberg News.

``It does imply an overall softness for the Canadian dollar, which is a reflection of commodity prices coming down,'' said Osborne, who expects the dollar to weaken to C$1.04 or C$1.05 by year-end. ``We expect oil to come down. The dollar will be on more stable footing by year-end.''

Decoupling Challenged

As growth slows in global markets starting to feel the effects of a U.S. slowdown, commodity currencies could suffer from a reduction in exports.

``Clearly the notion that the rest of the world has decoupled is now being challenged,'' said Matthew Strauss, a senior currency strategist at RBC Capital Markets Inc. in Toronto, a unit of Canada's biggest bank. ``With the U.S. already well into the slowdown, and the other economies only starting to slowdown quite dramatically in the second half of the year, and prospects the U.S. economy recovering maybe early in 2009, the move on the currency market will be in favor of the U.S. dollar.''

Housing Market

Housing will contribute just 0.1 percentage point to Canada's economic expansion this year after acting as one of the strongest sources of growth earlier in the decade, the Bank of Canada said in an April forecast. Still, the market has been ``resilient'' compared with that of the U.S., Deputy Governor Sheryl Kennedy said in a speech last month.

``Canada never had the excesses the U.S. had, some of the structural issues,'' said Jonathan Gencher, director of foreign- exchange sales at BMO Capital Markets in Toronto, a unit of Canada's fourth-largest bank. ``It won't be in any way impacted near where the U.S. is. I still think the U.S. dollar will do better against Canada, but I do like the Canadian dollar against the most of the majors, against the euro, the pound, the aussie, against the kiwi.''

The yield on the two-year bond was little changed at 3.05 percent. The price of the 3.75 percent security due in June 2010 rose 2 cents to C$101.24. The 10-year bond's yield was little changed at 3.78 percent.

The U.S. 10-year Treasury note yielded 27 basis points more than the comparable-maturity Canadian bond, narrowing from 39 basis points on June 25.

Canadian government bonds have returned 3.2 percent this year. U.S. Treasuries have returned 2.3 percent in 2008, according to Merrill Lynch & Co. index statistics.

To contact the reporter on this story: Jamie McGee in New York at jmcgee8@bloomberg.net

Last Updated: July 29, 2008 16:44 EDT