November 23, 2011 / 9:40 PM / 6 years ago

Loonie slides to 7-week low on Europe worries

3 Min Read

TORONTO (Reuters) - The Canadian dollar skidded to a seven-week low against the U.S. currency on Wednesday as a weak German bond auction and soft economic data added to unrelenting investor anxiety about the euro zone debt crisis.

The euro fell to its lowest point since early October after Germany suffered one of its least successful debt auctions since the single currency was launched, while world stocks skidded on fears the debt crisis would engulf Europe's powerhouse economy.

The bond auction, described as "disastrous" and "horrible" by market observers, was a dangerous signal of investor frustration over the lack of new policy measures to halt the bloc's debt crisis.

Indeed, Bank of Canada Mark Carney warned of Europe's "barely contained" financial crisis and said authorities there needed to provide more details on how to resolve the troubles.

"Europe is still the key for pretty much everybody," said Benjamin Reitzes, senior economist and foreign exchange strategist at BMO Capital Markets.

"(Carney) mentioned Europe, the situation there, is 'barely contained' - far from encouraging words from the governor of the Bank of Canada. He said they essentially need to get their act together soon otherwise, and he didn't say this, but we'll all pay the price."

The Canadian currency finished the session at C$1.0485 against the greenback, or 95.37 U.S. cents, down nearly a penny from C$1.0378, or 96.36 U.S. cents, at Tuesday's close.

Weak manufacturing data from both China and Europe also helped to push the Canadian dollar lower, sending the greenback higher ahead of the U.S. Thanksgiving holiday on Thursday.

"The U.S. dollar is going to outperform. Euro is overvalued where it is, which is going to drag dollar/Canada higher. We're looking for levels at around C$1.0650," said David Bradley, director of foreign exchange trading at Scotia Capital.

Earlier on Wednesday, the Canadian dollar weakened to C$1.0497 to the U.S. dollar, or 95.27 U.S. cents.

Still, despite the weakness, the Canadian currency strengthened against most other major currencies. Many analysts have predicted it will outperform against the euro and its commodity-linked peers if Europe's debt crisis worsened.

Canadian government bond prices were higher, following the trend in the U.S. where Treasury debt prices rose as euro zone woes underpinned the safe-haven appeal of government debt.

The two-year bond ticked 1 Canadian cent higher to yield 0.897 percent and the 10-year bond rose 38 Canadian cents to yield 2.041 percent.

"Stocks are down, yields are lower, bonds are bid. It's a flight to safety," said Reitzes.

Editing by Rob Wilson

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