Loonie lower as Italian debt worries send investors to U.S. Treasuries

By: Malcolm Morrison
The Canadian Press

TORONTO—The Canadian dollar fell more than a full U.S. cent Wednesday as investors nervous about the state of Italy’s economy sold off risk and bought into the safe haven status of U.S. Treasuries.

The loonie fell 1.3 cents 97.89 cents US.

Financial markets had reacted positively Tuesday after premier Silvio Berlusconi lost a confidence vote and his majority in parliament and said he would resign after his government’s new austerity budget is passed. There was little confidence that he could implement the tough measures that eurozone officials have demanded.

But pessimism returned to markets with a vengeance Wednesday as the country’s 10-year yield jumped above the seven per cent level amid uncertainty about who will steer the country through its debt crisis.

There was also unhappiness about the fact Berlusconi isn’t resigning immediately.

“The problem ... is that we are now entering a political interlude that is too long a timeframe for an already grumpy market,” said Mark Chandler, Head of Canada FIC Strategy at RBC Dominion Securities Inc.

“The transitional government dynamic could prove messy in the interim, especially given that elections would unlikely be held before February.”

Bond yields in the seven per cent range are considered to be unsustainable in the long run.

When Greece, Ireland and Portugal saw their ten-year borrowing rates rise above seven per cent, the markets concluded they had to be bailed out.

The dollar was also pressured by commodity prices forced lower on demand concerns and the rising U.S. dollar.

A stronger greenback usually helps depress prices for oil and metals, which are denominated in dollars, as it makes commodities more expensive for holders of other currencies.

Commodity prices headed lower Wednesday with the December crude contact on the New York Mercantile Exchange down $2.17 to US$94.63 a barrel.

Metals also fell back as the December copper contract in New York lost six cents to US$3.48 a pound.

The December gold contract in New York was off $6.70 to US$1,792.50 an ounce.

http://www.thestar.com/business/article/1083797--loonie-lower-as-italian-debt-worries-send-investors-to-u-s-treasuries