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TORONTO (Reuters) - The Canadian dollar hit a three-month low against its U.S. counterpart on Tuesday after Greece said it would hold new elections, increasing investor fears about the country's possible exit from the euro zone.
Attempts to form a government in Greece collapsed on Tuesday, jolting financial markets with the prospect that leftists opposed to the terms of an EU bailout could sweep to victory in a June vote.
The news prompted heavy selling of stocks and commodity-linked currencies such as the Canadian dollar. <MKTS/GLOB>
Against the euro, however, the Canadian currency rallied to C$1.2775, or 78.28 euro cents, its strongest level since January 2011. It also gained against other major European currencies including the Swiss franc, sterling and the Swedish and Norwegian crowns.
"A lot of traders are looking to trade the CAD versus the crosses like the pound, the yen and the euro versus dollar/CAD by itself," said Gareth Sylvester, senior currency strategist at risk management firm Klarity FX in San Francisco.
Against the greenback, the Canadian currency hit a low of C$1.0074, or 99.27 U.S. cents, its weakest level since January 25.
The Canadian dollar ended the session at $1.0068 versus the U.S. dollar, or 99.32 U.S. cents, weaker than Monday's North American session finish at C$1.0029 versus the U.S. dollar, or 99.71 U.S. cents.
Analysts noted the currency has been confined to a range between C$1.01 and C$0.98 since late January.
"It's the great sideways trade of 2012 that continues unabated," said Jack Spitz, managing director of foreign exchange at National Bank Financial.
Earlier in the session, the Canadian dollar had been on firmer ground on the back of surprisingly strong growth data from Germany.
Investors will look to Canadian inflation data for April on Friday for more significant direction, watching for any clues on the timing of the Bank of Canada's next tightening move.
"If core inflation is above 2 percent it adds to the suggestion that the Bank of Canada is going to be one of the leading central banks in terms of pulling back excessive accommodation, so it could inspire some more Canadian dollar bids," Spitz said.
According to a Reuters poll, however, Canadian consumer prices likely remained subdued in April, leaving the annual inflation rate unchanged from March, when it dropped to an 18-month low of 1.9 percent, suggesting that price pressures are the least of the Bank of Canada's worries.
Canadian government bond prices were little changed despite the risk-averse tone in markets, largely tracking U.S. Treasuries as traders booked profits from an eight-week run-up. <US/>
The two-year government bond was down 4 Canadian cents to yield 1.292 percent, while Canada's 10-year bond gained 3 Canadian cents to yield 1.932 percent.
With additional report by Jeffrey Hodgson; Editing by Peter Galloway