March 20 (Bloomberg) -- Canada's currency declined to its lowest against the U.S. dollar in almost two months as commodity prices plunged for a second day, clouding prospects for the nation's economy.

The Canadian dollar registered its biggest weekly drop since 1985, 3.4 percent. Gold fell more than $110 an ounce, copper headed for its steepest weekly decline in 10 months and crude oil dropped below $100 a barrel for the first time since March 5. Commodities account for about half of Canada's exports, and the oil sands in Alberta contain the largest crude deposits outside the Middle East.

``We are in the process of a change in demand for risky assets,'' said Laurent Desbois, president of the Montreal-based currency fund Fjord Capital, which oversees $90 million. ``With global growth slowing markedly and systemic risk in the financial system, cash will once again be king. This will impact commodities and weaken the commodity currencies.''

Canada's dollar dropped 1 percent to C$1.0242 per U.S. dollar in Toronto at 4:28 p.m., from C$1.0137 yesterday, when it fell 2.2 percent. It touched C$1.0295, the lowest since Jan. 23. One Canadian dollar buys 97.63 U.S. cents.

Other currencies of commodity-producing countries also tumbled, with the Australian dollar and Norwegian krone leading the plunge, amid speculation a global economic slump will reduce demand for raw materials.

Canada's currency, nicknamed the loonie after the image of the bird on its one-dollar coin, surged 17 percent last year as commodity prices soared. The gains spurred speculation that the economy was becoming less dependent on the U.S., the nation's largest trading partner, as demand climbed for exports to nations such as China and India.

Leading Indicators Fall

Government reports this year have showed signs the world's eighth-largest economy is faltering as the slump in the U.S. broadens.

The Canadian currency extended its losses today after a report showed the nation's index of leading economic indicators unexpectedly fell 0.3 percent in February, as manufacturers continued to struggle and the housing market weakened. Economists had forecast a 0.1 percent rise, according to the median of 16 estimates in a Bloomberg News survey.

``People are expecting a recession in the U.S., and with that recession they're expecting the commodity prices to come to more normal levels,'' said Carl Weinberg, chief economist at High Frequency Economics in Valhalla, New York. ``It means a soft period for the loonie, but that's still a temporary relief. The Bank of Canada still needs to cut rates if it wants to keep the loonie cheaper.''

Expensive Exports

The currency's strength has made Canada's exports expensive in overseas markets, forcing factories to cut jobs in Ontario and Quebec, the two largest provinces.

The Canadian central bank's policy makers are scheduled to meet next on April 22. They signaled on March 4, when they reduced the benchmark interest rate by 50 basis points to 3.5 percent, that more cuts are likely as they struggle to keep the economy growing amid lower export demand from the U.S. A basis point is 0.01 percentage point.

Canada's dollar has traded within a roughly 5 percent range with its U.S. counterpart since the start of the year, after climbing to a record in November.

``The Canadian dollar could break out of this range if we see further losses in commodities,'' said Doug Porter, deputy economist at BMO Capital Markets in Toronto. ``There was definitely a speculative element to the run of commodity prices in recent weeks, and that froth has been blown up this week.''

The yield on Canada's two-year government security rose 4 basis points to 2.55 percent. The price of the 4.25 percent bond due December 2009 fell 6 cents to C$102.78.

To contact the reporter on this story: Haris Anwar in Toronto at hanwar2@bloomberg.net

Last Updated: March 20, 2008 16:31 EDT