Canadian dollar drops on global economic concerns

* Canada dollar may be headed for 3rd straight losing week

* Market bracing for Bank of Canada rate cut next week

* Bonds rebound after Thursday's late-day selloff

By Frank Pingue

TORONTO, Oct 17 (Reuters) - The Canadian dollar was down
versus the U.S. dollar on Friday as continued uncertainty about
the outlook for the global economy extended demand for the
greenback.

Canadian bond prices, with no Canadian economic data to
influence a move, were higher across the curve as the market
braced for another aggressive Bank of Canada interest rate
announcement on Tuesday.

At 9:40 a.m. (1340 GMT), the Canadian unit was at C$1.1907
to the U.S. dollar, or 83.98 U.S. cents, down from, C$1.1816 to
the U.S. dollar, or 84.63 U.S. cents, at Thursday's close.

"It's still the same forces that have promoted the flight
to the U.S. dollar, which is a global deleveraging, which is
seeing money return home, in this case to the U.S.," said Avery
Shenfeld, senior economist at CIBC World Markets.

The slide in the Canadian dollar was cushioned by U.S. data
that showed housing starts continued to decline in September,
which ate away at some of the greenback's gains.

As was the case in Thursday's session, the Canadian dollar
continued to find buying interest each time it neared C$1.20 to
the U.S. dollar, or 83.33 U.S. cents, which suggests the recent
rally in the U.S. dollar may be losing steam.

"It's looking quite matured in terms of the general move
here (for the U.S. dollar)," said Shaun Osborne, chief currency
strategist at TD Securities.

"So I expect (the U.S. dollar) is probably going to
consolidate here for a little bit longer and I don't expect to
see levels significantly above the highs from late last week."

Last Friday the Canadian currency capped off an 8.4 percent
weekly slide with its biggest one-day drop since 1971 and fell
to C$1.2135 to the U.S. dollar, or 82.41 U.S. cents.

With concerns that the global economy is teetering on the
verge of recession, which would ultimately crimp demand for a
major Canadian exports such as oil, and persistent volatility
on equity markets, the Canadian currency appears unlikely to
regain much ground soon.

BOND PRICES REBOUND

Canadian bond prices were all up as the market returned its
focus to interest rates and the possibility of a 50-basis-point
interest rate cut by the Bank of Canada next week.

The rally in bond prices comes on the heels of a slide in
the previous session, when a late rally on the Toronto Stock
Exchange's main index convinced dealers to unload more secure
assets like government debt for riskier assets like stocks.

The Bank of Canada unexpectedly cut its key interest rate
50 basis points last week in a coordinated move by with other
central banks to hep calm ailing financial markets.

"The market has been underpinned the hope next week that
the Bank of Canada is going to be relatively aggressive," said
Mark Chandler, fixed income strategist at RBC Capital Markets,
who expects a 50-point cut next week. "As well, markets are
also being helped along by soft data."

The weak U.S. housing starts report on Friday followed soft
U.S. data from earlier in the week, including retail sales and
industrial output. Canadian data released on Thursday showed
manufacturing sales fell more than expected.

The Canadian overnight Libor rate LIBOR01 was 3.0667
percent, up from 3.175 percent on Thursday.

Thursday's CORRA rate CORRA= was 2.5057 percent, down
from 2.5114 percent on Wednesday. The Bank of Canada publishes
the previous day's rate at around 9 a.m. daily.

The two-year bond was up 14 Canadian cents at C$101.04 to
yield 2.243 percent. The 10-year bond rose 62 Canadian cents to
C$104.52 to yield 3.686 percent.

The yield spread between the two-year and the 10-year bond
moved to 126 basis points from 120 basis points at the previous
close.

The 30-year bond increased 95 Canadian cents to C$113.65 to
yield 4.177 percent. In the United States, the 30-year Treasury
yielded 4.237 percent.
(Editing by Peter Galloway)