Canadian dollar rally pauses as European fears rise to fore

Wed Jan 4, 2012 4:25pm EST
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By Claire Sibonney

TORONTO (Reuters) - The Canadian dollar dipped slightly against its U.S. counterpart on Wednesday, reversing some of its initial 2012 gains, as more negative headlines out of euro zone reminded investors that the currency bloc's woes will remain in focus this year.

One of the latest disappointments came from Italy's biggest bank, Unicredit, after it was forced to price a rights issue at a huge discount, raising fears that tight credit markets are making it expensive for European banks to raise capital and for euro zone countries to refinance debt.

Meanwhile, a muted benchmark German bond auction left markets unimpressed, weighing on the euro and broader investor confidence.

"Some active reality coming out of the euro zone. We had started the year fairly well in terms of a risk rally but all those EU angst issues and sovereign and financial issues rose to the fore again, a key reason why we remain cautious into early 2012," said David Watt, senior currency strategist at RBC Capital Markets.

Markets were upbeat on the first trading day of the year on Tuesday, pushing stocks and other riskier assets higher on the back of encouraging global economic data.

In a brisk start to the 2012 debt auction calendar, France will sell up to 8 billion euros of bonds on Thursday. But the key test of investor sentiment comes next week when Spain and Italy, the two countries most exposed to an escalation of the crisis, kick off their funding campaigns.

The Canadian dollar ended the North American session at C$1.0123 versus the U.S. dollar, or 98.78 U.S. cents, down a bit from Tuesday's close at C$1.0110 to the U.S. dollar, or 98.91 U.S. cents. RBC put near-term U.S. dollar resistance at C$1.0177.

The commodity-driven currency largely ignored a jump in crude prices after a European Union agreement to ban Iranian oil imports sent U.S. crude futures to settle above $103 a barrel.   Continued...