TORONTO (Reuters) - Canada's dollar dropped to a three-week low against its U.S. counterpart on Tuesday as Greece's struggle to form a new government fueled investor worries about Europe's ability to fend off a deeper crisis in the region.
Global equity, currency and commodity markets were rattled as Greece's political crisis intensified after a candidate for prime minister renounced the terms of a bailout that is keeping the country's finances afloat.
"It's a risk aversion move. We have a U.S. dollar that is strong right across the board," said Camilla Sutton, chief currency strategist at Scotiabank.
Canada's dollar had risen sharply following a more hawkish stance by the Bank of Canada last month. But traders have been paring back their expectations of a Canadian rate hike in recent sessions, reducing the appeal of the currency.
"European conditions are continuing to unfold on the sour side. People are coming to the realization that maybe we got ahead of ourselves," said Ian Pollick, fixed income strategist at RBC Capital Markets.
The Bank of Canada has frozen rates at 1 percent since September 2010 after it became the first in the G7 to raise borrowing costs from lows hit during the financial crisis.
The European news pushed the Canadian dollar to a low of C$1.0023 against the greenback, or 99.77 U.S. cents, its weakest since April 16.
It ended the session at C$0.9983 versus the U.S. dollar, or $1.0017, down from Monday's finish at C$0.9930 versus the U.S. dollar, or $1.0070.
"The Canadian dollar is lower because of increased risk aversion and that entirely relates to European political developments as the Greek election result continues to filter through the market," said Fergal Smith, managing market strategist at Action Economics.
Scotiabank's Sutton said she saw the near-term trading range for Canada's dollar at C$0.9928-C$1.0023 against the greenback.
Surprising strong data on Canadian housing starts, led by a surge in condominium construction, provided some support.
But it wasn't enough to boost the broader mood. Toronto's main stock index plunged to its 2012 low on Tuesday, with mining and energy shares among the big losers.
Canadian bond prices climbed and outperformed U.S. Treasuries across the curve.
Canada's 2-year bond gained 9 Canadian cents to yield 1.228 percent, while the benchmark 10-year bond was up 39 Canadian cents to yield 1.979 percent.
Additional reporting by Claire Sibonney; Editing by Jeffrey Hodgson