Nov. 19 (Bloomberg) -- Canada's currency weakened for a second day as global stocks dropped and oil prices fell, diminishing the outlook for countries that rely on commodity exports.

``Equity markets still look extremely vulnerable,'' said Ian Stannard, a senior currency strategist in London at BNP Paribas SA. ``Oil prices continue to move lower. This is all going to be unhelpful for the Canadian dollar.'' Stannard forecasts the currency will weaken to C$1.30 by year-end.

The Canadian dollar fell as much as 1.8 percent to C$1.2538 per U.S. dollar, from C$1.2312 yesterday. It traded at C$1.2528 at 4 p.m. in Toronto. One Canadian dollar buys 79.80 U.S. cents.

The MSCI World Index of stocks in 23 developed nations fell 4.6 percent to 822.14. Crude oil, which accounts for a tenth of Canada's export revenue, declined 2.2 percent to $53.15 a barrel.

``Recent trends are likely to remain in place,'' said David Watt, a senior currency strategist at RBC Capital Markets in Toronto. ``Equities do not look set for a sustained rebound. The U.S. dollar is set to eventually break higher with the associated fallout in other currencies.''

The risks to Canada's economy from a global credit crisis and recession have increased in the last month and will probably lead to a further reduction in interest rates, Bank of Canada Governor Mark Carney said in the text of a speech in London.

Borrowing Costs

The Bank of Canada cut borrowing costs six times in the past 12 months, lowering its overnight rate to 2.25 percent from 4.5 percent to spur the economy.

Policy makers will cut interest rates by 50 basis points when they next meet Dec. 9, predicted Charmaine Buskas, senior economics strategist at TD Securities in Toronto.

U.S. consumer prices plunged 1 percent last month, more than forecast and the most since records began in 1947.

International investors sold a net C$267 million ($214 million) of Canadian securities in September as C$3.8 billion of net bond sales offset purchases of stocks, Statistics Canada said today in Ottawa.

The 10-year note's yield dropped 3 basis points, or 0.03 percentage point, to 3.52 percent. The price of the 4.25 percent security maturing in June 2018 climbed 25 cents to C$105.93.

The yield on the two-year government bond fell 2 basis points to 1.91 percent. It touched 1.98 percent, the highest since Nov. 5. The price of the 2.75 percent security due in December 2010 rose 3 cents to C$101.67.

Yield Curve

The 10-year bond yielded 161 basis points more than the two- year security, down from 162 basis points yesterday and 184 basis points on Nov. 6, when the so-called yield curve was the steepest since May 2004.

The two-year bond's yield will rise to 2.04 percent by the end of this year, while the 10-year bond's yield will rise to 3.59 percent, according to the median forecasts of economists surveyed by Bloomberg News.

The yield advantage of 10-year Canadian government bonds compared with similar-maturity U.S. Treasury notes was 16 basis points. The U.S. security yielded 8 basis points more than its Canadian counterpart two days ago.

Canadian government bonds have returned 5.7 percent in 2008, according to Merrill Lynch & Co. index statistics. U.S. Treasuries have returned 7.4 percent this year.

To contact the reporter on this story: Chris Fournier in Montreal at cfournier3@bloomberg.net

Last Updated: November 19, 2008 16:02 EST