January 13, 2012 / 10:38 PM / in 6 years

Loonie falls on Europe downgrades, but ends up on week

TORONTO (Reuters) - The Canadian dollar fell against its U.S. counterpart on Friday as rating downgrades on several euro zone countries, including France and Italy, prompted worried investors to seek safety elsewhere.

The Canadian currency slid, but far less than the euro, which tumbled more than a cent on the downgrade talk leading up to S&P’s official announcement after the bell.

The large selloff in euro positions led to some profit-taking later in the day, which helped markets rally into the afternoon. For the week, euro shorts rose to a record 155,195 contracts as currency speculators increased their bets in favor of the U.S. dollar, according to data from the Commodity Futures Trading Commission released on Friday.

“We’ve seen some interest at the euro crosses, which has probably helped add to the bid tone in the euro so that’s caused some of the equities markets to recover as well,” said David Bradley, a director of foreign exchange trading at Scotia Capital.

The Canadian dollar ended the North American session at C$1.0227 to the U.S. dollar, or 97.78 U.S. cents, down from Thursday’s finish at C$1.0183 to the U.S. dollar, or 98.20 U.S. cents.

It gained back nearly 1 cent after hitting a session low at C$1.0320, or 96.80 U.S. cents. For the week the currency rose 0.4 percent, from C$1.0165 to the U.S. dollar, or 98.35 U.S. cents.

Losses were cushioned by more signs of North American economic strength as data on Friday showed U.S. consumer sentiment in January rose to its highest level in eight months while the U.S. trade deficit in November was the biggest in five months.

Additionally, Canada posted an unexpected trade surplus in November as a strengthening U.S. economy helped push exports to a three-year high.

“It’s encouraging for the Canadian economy, but you have to ask how strong will that U.S. growth be if Europe continues to have the problems that the downgrade will reflect,” said Gavin Graham, president at Graham Investment Strategy.

Over the last several months the Canadian dollar has traded in an increasingly smaller window as flows have thinned as nervous investors sit on their hands.

The U.S. dollar is expected to continue to find support around the C$1.0150 level against the Canadian currency and meet resistance at around the C$1.0350 level, said Bradley.

“I would expect the Canadian dollar to continue to outperform the rest of the G7 or G10 currencies,” Bradley added.

Canadian bond prices rose, tracking U.S. Treasuries higher as jittery investors poured money into less risky assets.

High demand for U.S. benchmark 10-year notes reduced yields to 1.87 percent, its lowest level this year.<US/>

Canada’s 10-year counterpart underperformed slightly in the flight to safety, climbing 50 Canadian cents to yield 1.926 percent.

Editing by Rob Wilson

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