Dollar falls on risk aversion

Wed Jan 16, 2008 5:37pm EST
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By John McCrank

TORONTO (Reuters) - Fears that demand for commodities will wane if U.S economy slides into recession prompted a return to risk aversion in the markets, knocking the Canadian dollar to it's lowest close against the greenback in nearly five weeks.

Domestic bond prices, which have rallied strongly as of late on a safe-haven bid, fell as investors took profits.

The Canadian dollar closed at 97.60 U.S. cents, valuing a U.S. dollar at C$1.0246, down from 98.37 U.S. cents, or C$1.0166, at Tuesday's close.

The currency fell as low as C$1.0284 to the U.S. dollar, or 97.24 U.S. cents, during the overseas session, its lowest point since September 18.

"The risk aversion theme is more than likely going to continue to set the trend due to the possibility of the U.S. economy going into a recession," said Jack Spitz, director of foreign exchange at National Bank Financial.

Investors tend to unwind carry trades in periods of risk aversion, and the Canadian dollar, which like carry trade currencies is largely commodity driven, is often pulled along.

A carry trade is when investors borrow low-yielding currencies, such as the Japanese yen, or the Swiss franc, to buy higher-yielding assets or currencies. Carry trade profits can be wiped out quickly by market volatility, so they are often unwound in times of risk.

The Canadian dollar was a major beneficiary from the run-up in commodity prices over the past several years, which helped it climb around 60 percent since 2002.   Continued...