January 11, 2012 / 10:18 PM / in 6 years

Loonie weakens versus dollar on fresh Europe fears

TORONTO (Reuters) - The Canadian dollar weakened against the U.S. currency on Wednesday, giving up gains made early this week, on intensified fears about Europe’s lingering debt crisis after a dire rating agency warning about the euro.

The euro slid to a 16-month low against the dollar and global stocks and other risky assets slipped after Fitch Ratings warned of serious risks if Europe did not act more aggressively to contain its debt crisis. <MKTS/GLOB>

But Canada fared better than some other commodity-linked currencies such as the Swedish and Norwegian crowns. It also outperformed sterling and hit a near one-year high against the euro.

“Although CAD slid back in what essentially looks to be a moving off of anything with a European name, CAD is still towards the top of the table,” said Stewart Hall, senior currency strategist at Royal Bank of Canada. “On a relative basis, CAD doesn’t look all that bad.”

The Canadian dollar ended the North American session at C$1.0193 to the U.S. dollar, or 98.11 U.S. cents, down from Tuesday’s North American finish at C$1.0170 to the U.S. dollar, or 98.33 U.S. cents.

The Canadian currency touched an intra-day high of C$1.014 to the U.S. dollar, it’s strongest level against the greenback in nearly a week, before retreating on the Fitch warning of a “cataclysmic” collapse of the euro if the European Central Bank does not increase its bond purchases.

“Against the backdrop of an enormous amount of paper that has to be put to bed over the next quarter, you’re going to have a heightened degree of sensitivity to these ratings stories,” said Hall.

The Canadian dollar, like most major currencies, is expected to take much of its direction later this week from events in Europe.

On Thursday, Spain will auction up to 5 billion euros of 2015 and 2016 paper, just hours before the ECB’s first monetary policy announcement and interest rate decision for 2012. Italy offers up to 4.75 billion euros of five-year bonds on Friday.

Canadian government bond prices were stronger following the Fitch warning as investors sought out safe-have assets.

Canada’s two-year government bond rose 4.5 Canadian cents to yield 0.951 percent, while the 10-year bond rose 36.5 Canadian cents to yield 1.94 percent.

Fears about the European crisis and its impact on the global economic outlook boosted demand at Canada’s sale of two-year government bonds.

Editing by Jeffrey Hodgson

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