BUSINESS
10/04/2011 08:40 EDT | Updated 12/04/2011 05:12 EST

Canadian Dollar Drops On Sinking Commodities, Fears Of Trade War

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TORONTO - The Canadian dollar continued to lose ground Tuesday as worsening economic prospects and worries about a Greek government default sent traders to the perceived safe haven of U.S. Treasury bonds.

It was another volatile day for the loonie, which closed down 0.34 of a cent at 94.8 cents US, with pressure also coming from sliding oil and gold prices. It earlier fell as low as 93.83 cents US, its lowest level since August, 2010.

"Risk aversion dominates markets," said BMO Capital Markets senior economist Benjamin Reitzes.

"Ongoing worries about Europe, talk of a bigger haircut on Greek debt (probably inevitable), Goldman Sachs calling for recession in Europe and a brewing U.S.-China trade war are all weighing on markets."

The loonie has plummeted about seven cents US since the beginning of September as traders have bailed out of currencies of commodity-based economies such as Canada, Australia and New Zealand.

Investors worry about generally slowing economic conditions in most countries. And the possibility that Greece will default on its debt has also deepened pessimism. There is also frustration that European leaders have not come up with a comprehensive program to deal with all heavily indebted countries in the eurozone.

But market sentiment improved late in the afternoon Tuesday after the Financial Times reported that eurozone officials were studying a bank recapitalization plan.

Traders also took in news that it could be some time before the Bank of Canada resumes raising interest rates. The Bank of Montreal said Tuesday that it does not expect interest rate to rise again until the early part of 2013 because of weak economic conditions. That’s about six months later than earlier forecasts that rates would stay flat until the fall of 2012.

Falling commodity prices also pressured the Canadian currency.

The stronger U.S. dollar and the prospect of slower economic growth continued to drive oil prices much lower, with the November crude contract on the New York Mercantile Exchange down $1.94 at US$75.67, its lowest close since September, 2010.

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

Copper prices came back from early lows but the December contract closed down five cents at US$3.10 a pound after going as low as US$3.04. Copper is widely viewed as a barometer for the health of the overall global economy since it is used in electronics, homes and infrastructure.

Gold prices also headed lower with the December bullion contract on the Nymex down $41.70 at US$1,616 an ounce.