TORONTO (Reuters) - The Canadian dollar weakened toward parity with the greenback on Wednesday as gains made overnight following U.S. President Barack Obama's re-election gave way to concerns about brewing fiscal problems in the United States and Europe.
Obama defeated Republican challenger Mitt Romney on Tuesday after a grueling presidential race, while Obama's fellow Democrats retained control of the Senate and Republicans kept their majority in the House of Representatives.
The results signaled no dramatic shift in U.S. economic policies. But investors, worried about the looming U.S. "fiscal cliff", sought safety in assets considered less risky than the Canadian dollar.
In the "fiscal cliff" scenario, a $600 billion package of tax increases and spending cuts is scheduled to take effect automatically at the end of 2012, likely driving the economy into recession, unless the White House and Congress reach a deal to avert it.
The prospect of the United States failing to draw back from returning to recession drove stock markets down sharply on Wednesday.
"The steep slide in equity prices tells the story for risk assets in general and that includes the Canadian dollar. So the weakness in the (Canadian dollar) is pretty much following on that trend," said Greg Moore, FX strategist at TD Securities.
"We're basically in the same place we were before the election. The division is still there. Basically the market sense would be that negotiations might be just as difficult as they were before the election."
Around noon, the Canadian dollar slipped to C$0.9971 to the U.S. dollar, or $1.0029, weaker than its North American finish on Tuesday at C$0.9918, or $1.0083. It was also underperforming against most other major currencies.
Overnight, the currency strengthened briefly to a near three-week high of C$0.9875, or $1.0127, a move shared by its commodity-linked counterparts. It touched its strongest level against the euro in nearly a month and had its best showing against the pound in about two weeks.
Data on Wednesday signaled that manufacturing in Germany, Europe's largest economy, is running out of steam three years into the euro zone debt crisis.
The weak German data was a catalyst for the initial risk-asset sell-off, Moore said, but as the North American session opened, focus turned to fears the fiscal cliff could crush U.S. economic recovery.
Separately, European Central Bank President Mario Draghi said the bank expects the euro zone economy to remain weak "in the near term". The ECB is expected to maintain its monetary policy when the group meets this week.
"The comments from the ECB ... weighed on sentiment a little bit so you saw Canada weaken off on that news and I think U.S. dollar gained some of that safe-haven flow on the risk-off reaction to it," said Don Mikolich, executive director, foreign exchange sales at CIBC World Markets.
A huge rally in Greece involving tens of thousands of protesters underscored the ongoing unrest over the euro-zone crisis. The demonstration was held as Greek lawmakers were set to narrowly pass an austerity package to win aid from lenders.
Mikolich expected the trading range for the Canadian dollar to hold to C$0.9850 to U.S. dollar parity in the near term.
The price of Canadian government debt rose across the curve. The two-year government of Canada bond was up 9 Canadian cents to yield 1.072 percent, while the benchmark 10-year bond was up 64 Canadian cents to yield 1.736 percent.
Editing by Jeffrey Hodgson; and Peter Galloway