The loonie fell 0.65 of a cent to 97.31 cents US, its lowest close since late June 2012, amid fading hopes that the elections in Italy, a country hit hard by the eurozone's government debt crisis, would yield a clear winner.
Early polls had raised prospects that the centre-left coalition led by Pier Luigi Bersani has claimed the most votes in Italy's election. That meant he would be in a position to form a government, possibly in conjunction with Mario Monti, the former technocratic premier who has been widely credited in the markets for dousing the country’s debt crisis.
But those hopes evaporated as the election appeared to be heading towards gridlock with Bersani’s forces moving toward victory in the lower house of Parliament while the camp of former premier Silvio Berlusconi gained the upper hand in the equally powerful Senate.
Add in the strong result of the 5 Star Movement of ex-comic turned-political agitator Beppe Grillo and fears grew that the next government will lack the will to carry on with tough austerity measures.
Italy has the second-highest level of debt among the 17 eurozone countries as a proportion of its annual gross domestic product. Only Greece’s is higher.
The wave of uncertainty arising from the results pushed the euro to a six-month low against the American currency.
February has not been kind to the loonie, which is down about 2.5 US cents for the month on a combination of factors.
These include sliding commodities, worries about the strength of the Canadian housing sector and the price differential between benchmark Brent crude and Western Canadian Select from the oilsands.
Traders are also concerned about U.S. economic strength, particularly as a March 1 deadline looms when more than US$85 billion in across the board spending cuts will be triggered.
Also, the U.S. dollar gained strength last week amid concerns the U.S. Federal Reserve may abandon its easy monetary policy sooner than many analysts have been predicting.
Finally, the loonie was hit at the end of last week as lower than expected retail sales for December pointed to a weakening economy while tame inflation figures indicated the Bank of Canada won't be raising rates any time soon.
Economists think it could be some time before the loonie resumes its perch above parity with the greenback.
"In light of the recent weakness, persistently soft data and lacklustre economic outlook, we’ve downgrade our call on the dollar with the currency now expected to strengthen at a more subdued pace over the next year (and) ending 2013 at parity," said BMO Capital Markets senior economist Benjamin Reitzes.
This week, the major piece of economic data comes out Friday. Statistics Canada is expected to report that Canadian gross domestic product grew by 0.7 per cent in the fourth quarter. But it looks like growth started to flatten at the end of the year as the economy likely contracted by 0.1 per cent in December after rising 0.3 per cent in November.
Commodity prices were mixed with the April crude contract on the New York Mercantile Exchange off two cents to US$93.11 a barrel.
March copper gained one cent to US$3.54 a pound while April gold bullion jumped $13.80 to US$1,586.60 an ounce.Suggest a correction