CANADA FX DEBT-Europe fears send C$ to 16-week low
* C$ hits C$1.0031 vs US$, or 98.71 U.S. cents * Weakest level since Jan. 25 * Bond prices edge lower across the curve By Claire Sibonney TORONTO, May 16 (Reuters) - The Canadian dollar hit a 16-week low against the U.S. dollar on Wednesday as fears of a Greek exit from the euro zone and a worsening debt crisis facing other European nations gripped financial markets. Expectations that Greece could leave the 17-member currency bloc increased markedly after political leaders in Athens failed to form a government on Tuesday, forcing another round of elections. Opinion polls show this is likely to be won by leftist parties opposed to the country's bailout deal. A Greek departure from the euro zone would have a potentially huge knock-on effect on struggling economies such as Italy and Spain, whose bond yields climbed above the crucial 6 percent mark in the previous session. "The problems in Europe are certainly escalating and causing a lot of stress in the markets and I think the Canadian dollar will unfortunately be sideswiped," said Blake Jespersen, managing director of foreign exchange sales at BMO Capital markets. Overnight, the currency slipped as far as C$1.0131, or 98.71 U.S. cents, its weakest level since Jan. 25. By 8:07 a.m. (1207 GMT), the Canadian dollar recovered somewhat to C$1.0080 versus the U.S. dollar, or 99.21 U.S. cents, still down from Tuesday's North American session close at $1.0068 versus the U.S. dollar, or 99.32 U.S. cents. Jespersen noted that Canadian clients have been waiting for a pop higher in the U.S. dollar to sell greenbacks, helping the domestic currency cut some of the day's losses. Over the next month however, he said the Canadian dollar could tumble as far as C$1.03. "The Greek election isn't until June 17 so the markets have to wait a month for that unless we get some kind of ECB bailout between now and then. I think the problems in Europe could continue to escalate and it is causing a flight to quality," he said. "I think it's only a matter of time that our dollar will start to play a little bit of catch-up with the selloff in other asset classes." Canadian bond prices edged lower across the curve. The two-year government bond was down 3 Canadian cents to yield 1.306 percent, while Canada's 10-year bond lost 16 Canadian cents to yield 1.953 percent.
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