June 13, 2012 / 12:48 PM / 6 years ago

Canada dollar weakens on Spain bank rescue worries

TORONTO (Reuters) - Canada’s dollar weakened against its U.S. counterpart on Monday, as investors continued to worry about the euro zone’s debt problems even after the approval of a rescue package for Spain’s banking sector.

Images of the front and the back of the new Canadian 50 dollar bill, made of polymer, are seen on display before a news conference in Quebec City, March 26, 2012. REUTERS/Mathieu Belanger

Concerns about how the Spanish bailout would be financed weighed on sentiment, along with the fear Greek elections on Sunday could put Athens on a path to leaving the currency bloc.

“I don’t think anyone’s really convinced that the Europeans have done enough to get ahead of the curve here,” said Shaun Osborne, chief currency strategist at TD Securities.

“The numbers involved in the bank bailout scheme appear to be quite substantial, but I think there’s some concern that we haven’t really got the full details on just how this is going to be implemented.”

The weekend deal by the 17-nation currency area to lend Madrid up to 100 billion euros ($125 billion) for its bank rescue fund, more than an initial audit suggests it is likely to need, is an attempt to reassure investors and erect a new firewall in the crisis.

“The fact that the authorities have actually got together and done something was seen as a positive,” said Jeremy Stretch, head of foreign exchange strategy at CIBC World Markets in London. “But when you sit down in the cold light of day ... the bank bailout does nothing to deal with the paucity of growth in Spain.”

Stretch said the banks’ underlying solvency problems cannot be fixed with additional capital as long as sluggish growth continues to lower the value of their collateral. He noted there are also questions about where the money will come from.

The Canadian dollar initially rose to C$1.0202 against the U.S. dollar, its strongest since May 22, following news of the rescue plan.

But it closed at C$1.0312, or 96.97 U.S. cents, weaker than Friday’s close at C$1.0270, or 97.37 U.S. cents.

Osborne said he saw Canada’s dollar trading between C$1.025 and C$1.035 in the next 24 hours.

The euro also surrendered all of its earlier gains against the U.S. dollar as investors focused on the deal’s obligations, and Spanish and Italian bond yields rose sharply.

Canadian bond prices rose, with the two-year bond up 7 Canadian cents to yield 1.007 percent, while the benchmark 10-year bond was up 43 Canadian cents at 1.765 percent.

Editing by Jeffrey Hodgson

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