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TORONTO (Reuters) - Canada's dollar made slight gains against the U.S. currency on Wednesday, but was vulnerable to broader risk aversion as weak German economic data and worries about European bond auctions later in the week weighed on investors' minds.
Data showing the German economy shrank in the last 3 months of 2011 dimmed hopes of a improvement in the economic outlook in the region, helping to drag down global stocks.
The currency also is still seen as highly vulnerable to developments in the euro zone, including government bond auctions on Thursday and Friday from Spain and Italy, two countries at the center of the euro zone crisis.
"We thought the currency would still be a little bit on the backfoot because of developments in Europe. It looks like we've had a bit of a reprieve, but the problems obviously aren't solved," said Mark Chandler, head of Canadian fixed income and currency strategy at RBC Capital Markets.
At around 7:55 a.m., the Canadian dollar was at C$1.0162 to the U.S. dollar, or 98.41 U.S. cents, up slightly from its North American session finish on Tuesday at C$1.0170 to the U.S. dollar, or 98.33 U.S. cents.
Chandler said commodity currencies have benefited in recent session due in part to the prospect for further policy easing in China, but also on a broader risk-on sentiment at the outset of the year.
With no major economic data of note on tap, economists and strategists said the currency would be highly influenced by global headlines including the Beige Book, the U.S. Federal Reserve's anecdotal information on current economic conditions.
Elsewhere, the euro dropped to within sight of a 16-month low against the dollar after Fitch ratings agency said the European Central Bank should do more to resolve the region's debt crisis, prompting nervous investors to sell the single currency.
Weak oil prices also capped the currency's gains as worries about the euro zone sparked fears about the demand outlook, which offset fears about supply disruption in Iran prompted by a blast in Tehran.
Canadian government bond prices were largely flat across the curve with Canada's two-year government bond unchanged to yield 0.973 percent, while the 10-year bond fell 2 Canadian cents to yield 1.978 percent.
Editing by Theodore d'Afflisio