Feb. 5 (Bloomberg) -- Canada's currency fell the most in a month on concern that a U.S. recession will reduce demand for Canadian commodity exports.

Traders sold currencies of commodity-exporting countries as the U.S. economy falters and data from Europe suggested the international economy may face a slowdown.

``A fear of a possible U.S. recession is taking its toll on commodity currencies,'' said Andrew Chaveriat, a technical foreign-exchange strategist at BNP Paribas Securities SA in New York. ``The U.S. dollar is going to continue this rally as people avoid risky bets, and we may see some weakness in the Canadian dollar.''

Canada's currency, known as the loonie after the image of the bird on its one-dollar coin, fell 1.3 percent, the most since Jan. 4, to C$1.0068 per U.S. dollar at 4:30 p.m. in Toronto. One Canadian dollar buys 99.33 U.S. cents.

Prices of the nation's commodity exports also declined. Crude oil for March delivery fell $1.61, or 2 percent, to $88.41 a barrel. Gold for immediate delivery dropped $14.20, or 1.6 percent, to $895.20 an ounce. Commodities account for about half of Canada's exports.

The currency is lower today against 12 of the 16 major currencies, led by the Brazilian real and the Taiwanese dollar. It extended its losses after a report from the U.S. showed service industries unexpectedly shrank in January at the fastest pace since the last recession, as the housing slump deepened and consumer spending cooled. The U.S. consumes about 80 percent of Canada's exports.

Damage Assessment

``The Canadian dollar may be an underperformer for the short run,'' said Steve Butler, a director of foreign exchange trading at Scotia Capital Inc. in Toronto. ``The market is trying to figure out how much damage the U.S. recession is going to have on the Canadian economy.''

Canadian bonds rose and yields fell as declining equity prices worldwide encouraged investors to buy safe-haven government securities. The yield on the two-year Canadian bond is close to its lowest since 2005.

Earlier, reports from the euro zone showed service industries grew at the slowest pace in more than four years and retail sales dropped the most since 1995.

According to the median forecast in a Bloomberg survey, Canada's economic growth will likely slow to 2.1 percent in 2008, from 2.6 percent last year.

Canadian Finance Minister Jim Flaherty said Jan. 25 his country's economy remains strong even though the global credit squeeze is likely to trigger further interest rate cuts from the central bank.

Rate Advantage

For now, Canada's rate advantage over the U.S. may deter traders from pushing the currency lower. The U.S. Federal Reserve reduced its benchmark interest rate to 3 percent Jan. 30. That widened the Canadian-U.S. rate gap to 1 percentage point, the most since 2004.

``The disparity between U.S. and Canadian interest rates should support the Canadian dollar in the first two quarters,'' said C.J. Gavsie, managing director of corporate and institutional foreign exchange sales in Toronto at BMO Capital Markets.

``The Bank of Canada will not be as aggressive in cutting rates as the Fed is,'' Gavsie said. At the same time, ``the Canadian dollar should also get support from commodity prices as long as they can hold in'' their elevated levels. Crude oil has risen 5 percent in the past year, and gold is about 36 percent higher.

The Bank of Canada lowered its main interest rate a quarter-percentage point to 4 percent on Jan. 22.

Further Cuts Seen

Interest-rate futures in Canada suggest that traders have increased their bets on further cuts in Canada. Bankers' acceptances futures for June dropped to 3.28 percent today, from 3.41 percent yesterday. The futures have settled at a three- month lending rate averaging 16 basis points above the central bank's target since Bloomberg started tracking the data.

The yield on Canada's 4.25 percent two-year government security due December 2009 declined about 13 basis points, or 0.13 percentage point, to 3.03 percent. The price rose 22 cents to C$102.13. The yield had dropped to 3.013 percent on Jan. 22, the lowest since September 2005.

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

Last Updated: February 5, 2008 16:53 EST