BUSINESS
12/14/2011 08:49 EST | Updated 02/13/2012 05:12 EST

Loonie down amid European debt worries, disappointment over Fed statement

TORONTO - The Canadian dollar closed lower Wednesday as investors bought into the U.S. dollar amid market disappointment with European efforts to fix the debt crisis.

The loonie was down half a US cent to 96.19 cents US.

Traders avoiding risk also sent commodity prices sharply lower.

The January crude contract on the New York Mercantile Exchange was down $5.19 to US$94.95 a barrel, the March copper contract in New York dropped 16 cents to US$3.28 a pound and the February bullion contract dropped $76.20 to US$1,586.90 an ounce.

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

At the same time, the euro fell through the psychologically important US$1.30 level after Italy was forced to pay higher borrowing rates to get investors to buy its bonds. By late morning, the euro stood at US$1.2976 after Italy paid an average yield of 6.47 per cent for investors to lend it €3 billion over five years.

The yield was up 0.17 percentage point from the last time Italy looked to raise money over five years and was the highest rate since 1997.

Italy has seen its borrowing costs, both in the markets and in bond auctions, rise markedly over the past few months as investors have grown increasingly worried over the country's ability to deal with its debts, which total around €1.9 trillion, or around 120 per cent of its GDP. It is considered too big to bail out by its partners in the 17-country eurozone.

"Selling pressure on the euro has accelerated materially as the European crisis continues to deepen," said Scotia Capital chief currency strategist Camilla Sutton.

"Yesterday's (Fed) statement provided no hint of quantitative easing and left the conditional commitment to holding rates steady until mid-2013 unchanged, accelerating euro selling pressure further."

Sentiment worsened during the morning after Germany's top central banker warned that the European Central Bank should not create new money as a way of solving the eurozone debt crisis.

Jens Weidmann said that making the central bank support government finances would cost it its independence. It would also cost it its credibility as an inflation fighter, Weidmann says.

Some economists say the ECB's power to create money and buy large amounts of government bonds is the only backstop that can convince markets European countries can pay their debts.

There was also disappointment after the Fed released a policy statement Tuesday that made clear it was not offering any new steps to help the economy. The Fed said that the U.S. economy, while improving, is still weak. The central bank added that unemployment remains high, and it remains vulnerable to the European debt crisis, which could push the continent into a recession and slow U.S. growth.