November 16, 2011 / 1:28 PM / 6 years ago

Dollar falls as anxiety about Europe mounts

3 Min Read

TORONTO (Reuters) - The Canadian dollar closed lower against the U.S. currency on Wednesday, but above the one-month low it hit earlier in the day, as concerns that the euro zone debt crisis is spreading kept investors away from risk assets.

That worry also pushed down global equity markets and the euro as the European Central Bank's purchases of sovereign debt failed to stem a selloff of euro zone bonds or to calm fears that the debt crisis is expanding. <MKTS/GLOB>

The euro fell to five-week lows against the dollar and the yen as rising French and Italian borrowing costs heightened concerns about euro-zone debt crisis contagion. <FRX/>

As well, sentiment was hurt by a statement released by Fitch rating agency that said U.S. banks have manageable direct exposure to stressed European markets, but that further contagion would pose a serious risk.

"There's been a give-up in equities and a give-up on risk-related currencies ... predominantly on the statements made by Fitch," said Jack Spitz, managing director of foreign exchange at National Bank Financial.

"The concern is of course that the contagion effect can happen not only in Europe but across the pond as well."

The Canadian dollar finished the session at C$1.0229 against the U.S. dollar, or 97.76 U.S. cents, down from Tuesday's North American close of C$1.0208 against the greenback, or 97.96 U.S. cents.

It was a volatile day for the Canadian dollar as it swung from a low of C$1.0290 early in the session to a high of C$1.0172. It hit the high on the back of a spike in oil prices above $100 a barrel. <O/R>

The resource-driven currency's correlation with oil came back into play after recently giving way to dominating worries about the euro zone debt crisis.

However, market players cautioned that the correlation will not be meaningful again until the European story moves to the back-burner.

"Oil has been a story of its own here with the run it's had over $100, and the correlation has broken down quite badly between the Canadian dollar and oil as of late," said Blake Jespersen, director of foreign exchange sales at BMO Capital Markets.

"You've seen crude rally almost 10 percent and the Canadian dollar really hasn't moved, in fact it's weakened off."

Jespersen noted there was support for the Canadian currency around C$1.0350 and resistance back toward parity with the greenback.

Bonds Flat to Higher

Canadian government bond prices were little changed to slightly higher across the curve. The two-year bond was unchanged to yield 0.902 percent, while the 10-year bond rose 68 Canadian cents to yield 2.723 percent.

Canada's sale of 30-year government bonds on Wednesday generated the lowest average yield in at least eight years as mounting euro zone debt concerns sent investors flocking to markets viewed as safe havens.

Additional reporting by Claire Sibonney; editing by Peter Galloway

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