BUSINESS
10/28/2011 08:43 EDT | Updated 12/28/2011 05:12 EST

Loonie lower, traders question how European bailout fund’s new powers will work

TORONTO - The Canadian dollar closed slightly lower Friday amid doubts about the new plan to deal with the European debt crisis.

The loonie was down 0.06 of a cent to 100.82 cents US after closing above parity with the greenback Thursday for the first time since Sept. 20.

Financial markets were reassured Thursday after eurozone leaders unveiled a plan to cut Greece’s debt, increase the firepower of the continent’s bailout fund to €1 trillion and strengthen the region’s banks, partially so they can sustain deeper losses on Greek bonds.

However, positive sentiment weakened somewhat Friday after analysts raised questions about the lack of detail in the plan.

Confidence was further undermined after Italy saw its borrowing costs rise in a sale of €7.9 billion in sovereign debt. The interest rate demanded by investors to lend the Italian government 10-year money topped six per cent, surpassing the 5.86 per cent rates paid a month ago.

Italy has seen its borrowing costs rise under pressure from Europe’s sovereign debt crisis. The European Central bank for weeks has been buying Italian bonds to keep rates at manageable levels.

"A weak Italian bond auction suggests that concerns over Italy have yet to be soothed and that there are many questions that have yet to be answered with the release of the EU summit’s package," observed Scotia Capital chief currency strategist Camilla Sutton.

Markets had also found support Thursday from hopes that China would participate in a European rescue package but Sutton added that "speculation that China will invest in Europe appears to be fading, as rumours swirl that the Chinese demands will come at too high a political cost."

Oil prices dropped amid doubts that the plan to contain the debt crisis will help boost global economic growth.

The December crude contract on the New York Mercantile Exchange lost 64 cents to US$93.32 a barrel after running up almost $4 Thursday.

Metal prices improved on Thursday's strong advances as December copper inched up one cent to US$3.71 after gaining 20 cents.

December gold was 50 cents lower to US$1,747.20 an ounce.