11/16/2011 08:38 EST | Updated 01/16/2012 05:12 EST

Loonie down, greenback benefits from safe haven status on European debt worries

TORONTO - The Canadian dollar closed lower Wednesday despite rising oil prices which breezed past the US$100 level to their highest close in more than five months.

The loonie was down 0.2 of a cent to 97.76 cents US. It had been as low as 97.21 cents US as worries about Europe's worsening debt crisis pushed traders to the perceived safe haven of U.S. Treasuries.

The December crude contract jumped $3.22 to US$102.59 a barrel, its highest level since June 2.

The gain came amid signs of lower U.S. inventories and improving economic data, such as Tuesday's release of a better than expected retail sales report for October.

"No economic slowdown appears to be in the works in the U.S. as retail sales, the Empire state manufacturing index, producer prices and machinery orders all reported positive numbers over the last few days," observed Bob Tebbutt, vice-president at Peregrine Financial Group Canada.

Analysts said another factor supporting higher crude was an announcement by Canadian gas distributor and oil pipeline company Enbridge Inc. (TSX:ENB) that it will pay US$1.15 billion to buy half ownership in the Seaway crude pipeline system between Texas and Oklahoma from U.S. oil giant ConocoPhillips.

The companies plan to reverse the pipeline that currently moves oil from the U.S. Gulf Coast to the oil storage hub at Cushing and say the move will give Gulf Coast refiners access to more North American crude and help them reduce reliance on imported oil.

Meanwhile, attention was again focused on Italy as economist Mario Monti said he has succeeded in forming a new government and aims to restart economic growth. However, bond markets continued to demand worrisomely high interest rates on Italian government bonds.

The yield on Italy’s benchmark 10-year bond jumped back to around the seven per cent mark Wednesday — a level widely viewed as unsustainable.

It is also a level that in the recent past forced other heavily indebted countries such as Ireland, Portugal and Greece to seek bailouts. However, Italy is the eurozone's third largest economy and, with debts equal to 120 per cent of gross domestic product, it is widely viewed as too big to bail out.

Sentiment worsened on markets late in the afternoon after ratings agency Fitch warned that the eurozone debt crisis poses a threat to U.S. bank ratings.

Other commodity prices were lower, reflecting worries about lower demand for oil and metals if Europe lands back in recession and stalls the global economic recovery.

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

The December copper contract on the Nymex lost two cents to US$3.48 a pound and the December gold contract gave back $7.90 to US$1,774.30 an ounce.