BUSINESS
12/07/2011 08:51 EST | Updated 02/06/2012 05:12 EST

Loonie down, markets look to European Central Bank rate announcement, EU summit

TORONTO - The Canadian dollar closed slightly lower Wednesday as doubts appeared about the likelihood of European leaders arriving at a fix for the government debt crisis at a summit later this week.

The loonie was down 0.07 of a cent to 98.98 cents US as traders also looked to an important interest rate announcement by the European Central Bank .

The European Central Bank makes its next announcement on interest rates Thursday and there are hopes that the ECB will cut its key rate by 0.25 of a point. Many economists reckon the region is heading towards another recession.

There were also high hopes that the summit of all 27 EU leaders can produce a convincing long-term plan to deal with the debt crisis.

"There is a lot to chew on, a lot that needs to be done, and much that is expected," said Mark Chandler, Head of Canada FIC Strategy at RBC Dominion Securities Inc.

"And, as has been the case so many times over the past year, these summits don't always tend to follow through on great expectations."

Doubts surfaced Wednesday after a senior German official suggested that European leaders could fail to agree on a plan to tighten the continent's economic ties by the end of the week. Instead, the official said it could take until Christmas for changes to the European Union treaty to be agreed upon, a critical first step in saving the euro.

He added that the government of Chancellor Angela Merkel is insisting on either a substantial change to the treaty governing the 27 EU countries, or an entirely new treaty for the 17 countries that use the euro to centralize decision-making on spending and borrowing for the 17 countries that use the euro.

Herman Van Rompuy, the president of the European Council, had earlier said an easier way to get agreement on future fiscal discipline would be to simply amend existing rules.

The treaty proposal is set to form the basis of discussions at the EU summit in Brussels on Friday.

Sentiment had improved Tuesday following a report that European leaders might create a second bailout fund to supplement the one they have already agreed to. The second fund would nearly double the capacity of Europe's financial rescue programs, the Financial Times reported.

But Bloomberg News reported Wednesday that Germany was rejecting proposals to combine the bailout funds.

Sentiment got a boost late in the session on a report by the Japanese news service Nikkei that the Group of 20 was considering a US$600 billion International Monetary Fund lending program for Europe. The IMF later denied the report.

There was little market reaction after ratings agency Standard & Poor's placed some of the largest euro-zone banks, including Societe Generale and Deutsche Bank on review for possible downgrades. Earlier in the week, S&P jolted markets in announcing it would review 15 eurozone sovereign ratings.

The dollar was also under pressure from lower commodity prices.

Price declines in crude accelerated on data showing American crude inventories unexpectedly rose by 1.3 million barrels last week. The January crude contract on the New York Mercantile Exchange fell 79 cents to US$100.49 a barrel.

Metal prices were also lower with the March copper contract off two cents to US$3.56 a pound.

But bullion prices advanced with the February contract ahead $13 to US$1,744.80 an ounce.