BUSINESS

Canadian dollar lower, traders avoid risk on worries about Spanish banks

05/30/2012 08:59 EDT | Updated 07/30/2012 05:12 EDT
TORONTO - Worries about Spain's deteriorating banking sector and falling prices for oil and copper pushed the Canadian dollar lower Wednesday.

The currency fell 0.6 of a cent to 97.16 cents US as nervous traders avoided riskier assets such as equities, commodities and resource-based currencies such as the loonie and bought into the safe haven of U.S. Treasuries.

The U.S. Treasury 10-year yield slid to a record, losing as much as 13 basis points to 1.617 per cent late in the afternoon. The euro weakened to a two-year low of US$1.2377.

The latest round of worry about the eurozone has shifted to the Spanish banking sector in recent days especially after Bankia, the country’s fourth-largest lender, last week announced it needed €19 billion in state aid.

The concern is that Bankia’s woes might spread across Spain’s banking sector, which has suffered badly from the collapse of the construction sector.

Investors sent Spain's borrowing costs higher with the 10-year government bond, a key indicator of market confidence in a country’s ability to pay down its debt, getting closer to the seven per cent level which is viewed as unsustainable. On Wednesday, the interest rate or yield on Spanish 10-year bonds shot up 25 basis points to 6.67 per cent, matching the level it hit at the height of the eurozone crisis late last year. The yield later fell back to hit 6.66 per cent in afternoon trading.

Earlier Wednesday, the government denied newspaper reports that the European Central Bank had rejected a Spanish idea to finance a bank bailout and it defended the country as sound.

The Financial Times reported Wednesday the ECB rejected the idea of Spain paying for the €19 billion bailout of Bankia by using government bonds, which would then be used as collateral for cash from the ECB.

Prices for oil and metals fell back on a higher U.S. dollar and expectations Europe's sputtering economy will drag on global crude demand. A stronger greenback usually helps depress commodity prices, which are denominated in dollars, as it makes oil and metals more expensive for holders of other currencies.

The July crude contract on the New York Mercantile Exchange lost $2.94 to US$87.82 a barrel, its lowest level since October.

Crude has plunged about 17 per cent from four weeks ago as investors also considered the growing possibility that political turmoil in Greece could trigger a chaotic exit of that country from the euro common currency.

Copper prices have also hit multi-month lows and the July contract on the Nymex dropped seven cents to US$3.39 a pound. Bullion prices advanced and the June contract closed up $14.70 to US$1,564.60 an ounce.

Meanwhile, data released Wednesday showed that economic confidence across Europe fell sharply in May, in a further sign that the recent escalation in the region’s debt crisis is being felt across the continent.

The European Commission, the European Union’s executive branch, said its economic sentiment indicator for the 17 countries that use the euro fell by 2.3 points in May to 90.6, its lowest level in around two and a half years.