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TORONTO (Reuters) - Canada's dollar dropped to a one-year low against its U.S. counterpart on Thursday, hurt by ongoing fears about Europe's debt crisis and big investors adjusting currency exposure on portfolios before month- and quarter-end.
Global markets were earlier buoyed by a vote by German lawmakers to beef up the crisis-hit euro zone's bailout package and better-than-expected data from the U.S. labor market, but the relief rally did not last.
Currency dealers said many institutional investors who suffered stock market losses in the quarter were rebalancing their foreign exchange exposure, buying the greenback against the Canadian dollar.
"Just looking at the performance of the equity market over the last month, I think most of the rebalancing flows will be buy dollar-Canada, that's probably why we've seen Canada underperform currencies like the euro," said David Bradley, director of foreign exchange trading at Scotia Capital.
The Canadian dollar ended the North American session at C$1.0366 to the U.S. dollar, or 96.47 U.S. cents, below Wednesday's North American session close of C$1.0326, or 96.84 U.S. cents.
It was a volatile session. The Canadian dollar touched C$1.0403, or 96.13 U.S. cents, late in the afternoon, its weakest point since September 2010, after having climbed as high as C$1.0256, or 97.50 U.S. cents, after the U.S. data was released.
Bradley said the Canadian dollar could weaken further on Friday, the last trading day of the month and quarter.
"We can probably test up toward C$1.0450. Really, on the brink of C$1.04 there is not much resistance until C$1.0675 which is the highs from last summer. It was really gappy when we were up here before," Bradley said.
The Canadian currency had initially firmed after Europe again averted disaster in its debt crisis when German lawmakers rallied behind Chancellor Angela Merkel to approve a stronger euro zone bailout fund, known as the European Financial Stability Facility (ESFS).
"It was nice to get the German passage of the ESFS bill but that's hardly the signal that the EU crisis is over. If anything it is just the start of the next phase of the crisis," said David Watt, senior currency strategist at Royal Bank of Canada.
Bigger challenges loom for the euro zone now. Financial markets are already anticipating a likely Greek default and demanding more far-reaching measures to prevent the crisis that began in Athens from spreading far beyond Europe and its banks.
Initial claims for U.S. unemployment benefits last week fell to a five-month-low of 391,000, well below economists' expectations for 420,000 and below the key 400,000 level for the first time since early August.
Separately, the U.S. economy grew at annual rate of 1.3 percent, the government said in its final estimate for the second quarter, up from the previously estimated 1.0 percent.
That reflected consumer spending and export growth that was stronger than earlier estimated.
Bond prices were mixed. The two-year Canadian government bond was unchanged in price to yield 0.928 percent, while the 10-year bond lost 10 Canadian cents to yield 2.206 percent.
Additional reporting by Claire Sibonney; Editing by Jeffrey Hodgson