TORONTO - (CP) The Canadian dollar was lower against the U.S. currency Tuesday, reflecting a flight to safety to the greenback amid another round of worry over the European government debt crisis.
The dollar was down 0.49 of a cent from Friday's close to 102.28 cents US as domestic markets reopened following the Victoria Day weekend.
"European developments continue to be major drivers of global markets," said a commentary from RBC Dominion Securities.
The currency lost ground on international currency markets Monday after Standard and Poor's lowered its outlook on Italy’s A-plus sovereign-credit rating from stable to negative last Friday. The ratings agency cited potential political gridlock that could derail the government’s plan to balance its budget by 2014.
In addition, investors were also uneasy over the political will in Spain to carry on with austerity measures after the ruling Socialist party sustained severe losses in regional elections during the weekend.
But the main concern centers on whether Greece will restructure its debt, a scenario which ratings agency Moody’s said would constitute a default, which could badly hit the other debt-laden euro countries.
The latest developments sent investors scurrying to the safe-haven status of U.S. Treasuries, and pushed the euro to an all-time low versus the Swiss franc and fell to its lowest level against the U.S. dollar since March.
The higher U.S. dollar had also pressured commodities Monday but prices recovered somewhat Tuesday, partly in response to word from Goldman Sachs Group Inc. that it is turning "more bullish" on raw materials. Goldman Sachs suggested buying oil, copper and zinc, reversing last month’s call to sell commodities.
The July crude contract on the New York Mercantile Exchange gained $1.94 to US$99.64 a barrel, almost making up for Monday's slide of US$2.40.
Metals also advanced as the July copper contract on the Nymex gained five cents to US$4.04 a pound.
Investors looking for safety also pushed June gold $10 higher to US$1,525.40 an ounce.
The Canadian currency was also under pressure after data last Friday showed weakening retail sales and an inflation report that basically met expectations.
Analysts say interest rates also figure into the loonie's weakness as conviction grows that the Bank of Canada will not embark on a string of hikes starting in July, as had been widely expected earlier this year.
"The odds of a (quarter point) increase by the Bank of Canada in July has been shaved to just 12 per cent, with the odds on the September meeting also slipping to just 40 per cent," said the RBC report.
"We believe that such an outcome is inconsistent with the underlying momentum in the Canadian economy (we continue to expect that growth in the first quarter will come in at a pace of near 3 3/4 per cent at an annual rate) but it is hard to fight the strength of the recent move."
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