BUSINESS

Loonie falls, growing worries Spain will need bailout sends traders to greenback

07/23/2012 08:48 EDT | Updated 09/22/2012 05:12 EDT
TORONTO - The Canadian dollar fell Monday as traders sold off risky assets amid growing worries that Spain will need a bailout.

The loonie closed down 0.4 of a cent to 98.35 cents US.

The shift came as investors left equities and commodities in favour of buying into the safe haven status of U.S. Treasuries.

"The week is off to a challenging start as rising fears over Europe push risk aversion higher," said Scotia Capital chief currency strategist Camilla Sutton.

"Most of the focus is on Spain, with rising concern it too will need to access financial aid."

Worries about Spain grew as the yield on the government’s benchmark 10-year bond surged to 7.45 per cent, its highest level since the euro was established in 1999.

If Spain’s borrowing rates continue to rise then the country may end up being locked out of international markets and be forced to seek a financial rescue, just like Greece, Ireland and Portugal.

On Friday, Spain’s eurozone partners agreed to lend the country up to €100 billion in funds to bail out banks laden down with toxic assets following the collapse of the country’s real estate bubble over the past four years.

Sutton also noted that a major acquisition in the Canadian oilpatch couldn't compensate for the latest bout of risk aversion.

China National Offshore Oil Company is picking up Calgary-based oil and gas producer Nexen Inc. (TSX:NXY) for US$15.1 billion in cash. CNOOC is paying $27.50 a share, a 61 per cent premium on the closing price of its shares on Friday at the New York Stock Exchange.

And Talisman Energy Inc. (TSX:TLM) is selling its 49 per cent interest in U.K. North Sea assets to Chinese firm Sinopec Corp. for $1.5 billion.

The Canadian dollar has been pushed higher in the past by big corporate deals. That is because a foreign buyer acquiring a Canadian company will need Canadian currency to close the deal, boosting demand for the loonie on financial markets.

Worries about how the worsening eurozone debt crisis could impact the global economy and a higher American dollar punished commodity prices.

The September crude contract on the New York Mercantile Exchange dropped $3.69 to US$88.14 a barrel.

Metal prices also backed off with September copper down seven cents to US$3.38 a pound.

And August bullion lost $5.40 to US$1,577.40 an ounce.

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