BUSINESS

Canadian dollar lower amid rising fears over health of Greek, Spanish banks

05/17/2012 08:50 EDT | Updated 07/17/2012 05:12 EDT
TORONTO - The Canadian dollar closed lower at fresh four-month lows Thursday amid continuing anxiety over the future of the eurozone.

The loonie lost 0.62 of a cent to 98.13 cents US as traders avoided riskier assets such as commodities and resource-based currencies such as the Canadian dollar.

Canada's dollar is down just over three cents this month compared with the American dollar, with losses picking up in the wake of the May 6 Greek election, which left no clear winner. Another election will be held June 17.

Greece is being kept afloat by huge international bailouts. But there are increasing worries that parties demanding an end to the grinding austerity measures that made those bailouts possible will hold the balance of power after that next round of elections.

Such a move could force Greece out of the eurozone with unpredictable consequences for the eurozone financial system and the wider global economy.

But the worries aren't just confined to Greece. Investors worry that destabilization could also hit other heavily indebted countries such as Spain, Ireland, Portugal and Italy.

Concerns are also rising about the health of the area’s banks.

Shares in Bankia, the recently nationalized Spanish bank, plunged by more than 20 per cent Thursday on a local report that customers have withdrawn more than €1 billion since the state took it over last week.

The bank is Spain’s fourth-largest and is heavily exposed to the country's collapsed property market.

And on Wednesday, Greece’s president said depositors were pulling hundreds of millions of euros out of banks, weakening the country’s already strained financial system.

"On the back of this, reports circulating that the European Central Bank will no longer be lending to Greek banks has aroused some attention," observed Mark Chandler, Head of Canadian FIC Strategy at RBC Dominion Securities.

"Though this is not to say the country is cut off — there still remain other channels of lending from the ECB that can occur."

Traders are also demanding more money to buy government debt.

Spain managed to auction nearly €2.5 billion in medium-term debt amid strong demand but at sharply higher interest rates.

The Spanish Treasury on Thursday sold three kinds of notes, two maturing in 2015 and one in 2016. Of them only one was strictly comparable to previous sales and the interest rate, or yield, on that three-year bond went up to 4.87 per cent from 4.04 per cent on May 3.

On the secondary market, the interest rate on Spanish 10-year bonds stood at 6.29 per cent.

Meanwhile, commodity prices were mixed after a string of bruising losses that have left prices for oil and metals at levels not seen in months.

Demand concerns have been a big reason for the slide in prices. But commodities have also been driven down by the rising American currency. That’s because prices are denominated in U.S. dollars and a higher greenback makes oil and metals more expensive for holders of other currencies.

And even before Greece reoccupied centre stage on markets, commodities and resource stocks were losing ground amid signs of a slowing global economy.

The June crude contract on the New York Mercantile Exchange slipped 25 cents to US$92.56 a barrel, its lowest level since early November.

Copper gained a penny to US$3.48 a pound after ending Wednesday's session at its lowest level since mid-January while bullion gained $38.30 to US$1,574.90 an ounce after closing at its worst level since last July.