12/29/2011 08:48 EST | Updated 02/28/2012 05:12 EST

Canadian dollar rises amid higher oil, tepid response to Italian bond auction

TORONTO - The Canadian dollar closed higher Thursday amid a tepid market response to an auction of Italian debt and weak commodity prices.

The loonie rose 0.32 of a cent to 97.96 cents US.

The Bank of Italy reported that the government raised a total of €7 billion euros.

Most importantly, it raised €2.5 billion of 10-year bonds at an average yield of 6.98 per cent. That’s lower than the 7.56 per cent it had to pay at an equivalent auction last month, but still uncomfortably close to the seven per cent level widely considered to be unsustainable in the long run.

Also, the amount borrowed fell short of the top of a target range of €8.5 billion.

Nervous investors at first sold off the euro, which at one point hit US$1.28, the lowest level since September 2010. It later traded at US$1.2961, up from $1.2938 in late North American trading Wednesday.

In another sign of unease, banks continued to park large amounts of money overnight at the European Central Bank, reflecting strains in the interbank lending market and a massive €489-billion infusion of cheap, long-term central bank credit into the banking system last week. The amount deposited overnight Wednesday was an elevated €436.58 billion, but still down from a record €452.03 billion Tuesday.

Meanwhile, oil prices also turned positive as traders balanced a report showing a smaller than expected jump last week in U.S. crude supplies with concerns about Iran’s threat to block a key Middle East oil shipping route.

The February contract on the New York Mercantile Exchange climbed 29 cents to US$99.65 a barrel after the U.S. Energy Information Administration said U.S. oil supplies rose by 3.9 million barrels last week. Analysts had expected supplies to shrink. The rise is a sign demand could be weakening.

But the gain was much less than the amount announced Wednesday by the American Petroleum Institute, which had said that crude inventories rose 9.6 million barrels last week.

Investors are also closely watching developments in the Persian Gulf. On Tuesday, Iran’s vice-president said his country would close the Strait of Hormuz, and cut off crude exports, if western countries impose sanctions on Iran’s oil shipments.

On Wednesday, the U.S. navy warned that any disruption of traffic in the strait, though which about a sixth of global oil production passes, would not be tolerated. And a Saudi oil ministry official said his country and other Gulf producers are ready to provide more oil if Iran tries to block the strait.

Metal prices were mixed with February gold on the Nymex down $23.20 at US$1,540.90 an ounce, while March copper was unchanged at US$3.37 a pound.