BUSINESS

Loonie down amid nomination of dovish Fed chair, risk from debt crisis

10/09/2013 08:37 EDT | Updated 01/23/2014 06:58 EST
TORONTO - The Canadian dollar lost ground for a second day Wednesday while the U.S. dollar gained strength on the nomination of a new Federal Reserve chief who will likely be in no rush to wrap up stimulus measures.

The loonie dropped 0.24 of a cent to 96.21 cents US following a loss of half a cent on Tuesday.

President Barack Obama has nominated Janet Yellen, currently the Fed’s vice-chairwoman, to head the U.S. central bank.

Yellen has been a key architect of the Fed’s efforts, under chairman Ben Bernanke, to keep interest rates near record lows to support the economy through US$85 billion of monthly bond purchases. Analysts believe she likely would continue steering Fed policy in the same direction as Bernanke.

Meanwhile, traders also looked to the release of the minutes from the Fed's last policy meeting Sept. 18. At that time, the Fed surprised markets in deciding not to start tapering its asset purchases because, in its view, the economy just wasn't ready for such a step.

One reason why Fed policy-makers did not begin tapering last month was due to concern over whether the different arms of the U.S. government could agree on a budget and the raising of the debt ceiling.

Those minutes showed that nearly every member of the Fed thought that the central bank should see more data before slowing its bond purchases. But worries about whether a delay would confuse markets made the decision a close call.

The loonie also sank amid increasing concerns over fiscal woes in Washington that have resulted in a partial shutdown of the U.S. government and raised worries about the country hitting its debt limit next week.

"The market is growing increasingly concerned over the ramification of the tail risk associated with ongoing government gridlock in the U.S.," said Scotia Capital chief currency strategist Camilla Sutton.

"Accordingly, there are some early signs of risk aversion entering markets. We do think there is apt to be a relief rally once this passes, but until then the risk is a sudden spike in risk and the U.S. dollar."

Commodities were lower as worries about the economic effects from the political impasse sent the November crude contract on the New York Mercantile Exchange tumbling $1.88 to US$101.61 a barrel.

December copper was down six cents to US$3.23 a pound, while December gold bullion fell $17.40 to US$1,307.20 an ounce.