Oct. 16 (Bloomberg) -- Canada’s dollar weakened for a second day as investors’ appetite for riskier assets decreased and the nation’s consumer price index declined for the fourth straight month.

The Canadian currency fell as Bank of America Corp.’s third-quarter loss pulled U.S. stock indexes from one-year highs. Speculation grew that the drop in inflation will keep Bank of Canada policy makers from raising interest rates at their meeting next week.

The depreciation in Canada’s dollar “has to do with more risk aversion, and the CPI is having a little bit of a hand in that, too,” said Maria Jones, a currency trader in Toronto at TD Securities Inc., a unit of Canada’s second-biggest bank. “The decline in consumer prices is very much supportive of the bank being on hold until the middle of the year, and the markets have picked up that.”

The Canadian currency, nicknamed the loonie for the aquatic bird on the C$1 coin, weakened 0.3 percent to C$1.0369 per U.S. dollar at 4:30 p.m. in Toronto, from C$1.0338 yesterday. One Canadian dollar buys 96.44 U.S. cents. The currency posted a weekly gain of 0.5 percent, from C$1.0422 on Oct. 9. It touched C$1.0207 yesterday, the strongest level since July 29, 2008.

The loonie’s decline over the past two days came after a five-day rally pushed the currency toward parity with its U.S. counterpart. The Canadian and U.S. dollars last traded on a one- for-one basis on July 22, 2008.

Consumer Prices

Canadian consumer prices decreased 0.9 percent last month from a year ago after a 0.8 percent decline in August, Statistics Canada said, matching the median forecast in a Bloomberg News survey. The CPI has fallen every month since May, the longest streak since 1953. The annual inflation rate excluding gasoline and seven other volatile items -- the so- called core rate the central bank uses to discern future price trends -- slowed to 1.5 percent from 1.6 percent in August.

Bank of Canada policy makers meet on Oct. 20 and are expected to hold the benchmark overnight rate at a record low of 0.25 percent, where it has been since April, according to all 23 economists in a Bloomberg News survey. Officials at their last meeting in September reiterated a pledge to keep the interest rate unchanged through June 2010 unless the outlook for inflation changes.

‘Didn’t Get Much’

“The market was looking for the Bank of Canada to come forward with its rate-hiking process,” said Amelia Bourdeau, a currency strategist in Stamford, Connecticut, at UBS AG. “They didn’t get much today to justify a further rally in the Canadian dollar.”

Canadian Prime Minister Stephen Harper reiterated today in remarks to reporters in Toronto that he shares Bank of Canada Governor Mark Carney’s concern that gains in the country’s currency could slow recovery. Carney said in a speech on June 4 that a persistently strong Canadian dollar would “work against” positive factors such as improved trade.

The Standard & Poor’s 500 Index fell for the first time in three days, dropping 0.8 percent after Bank of America reported a third-quarter loss of $1 billion, or 26 cents per diluted share, compared with a profit of $1.18 billion, or 15 cents, a year earlier. General Electric Co. reported $1.9 billion less revenue than analysts estimated.

Crude oil for November delivery rose 1.4 percent to $78.65 a barrel on the New York Mercantile Exchange after falling as much as 1 percent to $76.82. Canada generates more than half of its export revenue from raw materials, and crude is the nation’s biggest export. It gained 11 percent this month.

Commodity Currencies

The loonie was the fourth-best performer this month against the greenback among the 16 most-traded currencies tracked by Bloomberg, trailing the Australian dollar, Brazil’s real and the Mexican peso. Like Canada, Australia, Brazil and Mexico export commodities.

Now that the U.S. dollar surpassed C$1.0350, it should find resistance levels around C$1.0450, followed by C$1.0575 and C$1.0680, Jonathan Gencher, director of foreign-exchange sales at Bank of Montreal in Toronto, wrote in a note today. Resistance refers to the upper boundary of a trading range where sell orders may be clustered.

Canadian government bonds rose, pushing the yield on the benchmark 10-year note down seven basis points, or 0.07 percentage point, the most in five weeks, to 3.49 percent. The price of the 3.75 percent security due in June 2019 increased 54 cents to C$102.15. Government of Canada debt lost investors 1.6 percent this year, according to a Merrill Lynch index.

To contact the reporters on this story: Matt Townsend in New York at mtownsend9@bloomberg.net; Chris Fournier in Montreal at cfournier3@bloomberg.net

Last Updated: October 16, 2009 16:34 EDT