January 13, 2012 / 1:37 PM / in 6 years

Loonie lower on reports of euro zone cuts

TORONTO (Reuters) - Canada’s dollar sank against the U.S. currency on Friday in tandem with the euro and global stocks as investors shunned risk after a report that credit rating agency Standard & Poor’s is set to lower its ratings on several euro zone countries.

The possible downgrades would not include Germany and the Netherlands, a senior euro zone government source said. It was unclear which or how many countries’ debt ratings S&P would cut.

“It’s a wholesale move back into the U.S. dollar and the Japanese yen on safe-haven flow on the back of the rumor - not yet fact, but rumor surrounding the downgrades,” said Jack Spitz, managing director of foreign exchange at National Bank Financial.

“Realistically it should not come as a surprise. Europe is challenged and the world already knows that. But the market seems to be reacting to the headline risk that’s come out.”

At 10:15 a.m., the Canadian dollar was at C$1.0265 to the U.S. dollar, or 97.42 U.S. cents, down from its North American session finish at C$1.0183 to the U.S. dollar, or 98.20 U.S. cents.

Spitz said the euro would likely continue to guide currency moves, dragging down the Canadian, Australian and New Zealand currencies.

The turnaround comes after the Canadian dollar traded little changed on subdued market reaction to an Italian bond auction that failed to match the success of European debt sales the day before.

Italy’s three-year debt costs fell below 5 percent at the country’s first longer-term bond sale of the year, but demand wasn’t as strong as that for a Spanish sale the previous day.

Canadian government bond prices were higher across the curve, mirroring U.S. Treasures where bonds jumped on the downgrade report. <US/>

Canada’s 2-year bond climbed 6 Canadian cents to yield 0.951 percent, while the 30-year government bond sank C$1.30 to yield 2.497 percent.

Reporting By Jennifer Kwan; Editing by Frank McGurty

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