05/09/2012 11:02 EDT

Canadian Dollar Drops Below Parity As Turmoil Shakes Global Economy

TORONTO -- The Canadian dollar was below parity with the U.S. currency Wednesday morning as turmoil in Greece persuaded traders to avoid riskier assets like the loonie and opt for the perceived safety of U.S. Treasuries.

The loonie fell 0.75 of a cent to 99.42 cents US after sliding about half a cent on Tuesday.

"Risk aversion is the name of the game,'' said Mark Chandler, head of Canadian FIC Strategy at RBC Dominion Securities.

"The risk sell-off has undermined equities, undermined commodities and pulled the Canadian dollar along for the ride as well.''

Greece has weighed on markets since inconclusive elections Sunday failed to produce a party that could form a government and raised worries the country will end up leaving the euro common currency.

After the conservative New Democracy failed to muster enough support to form a government, the mandate has passed onto Syriza, a left-wing party that came a surprise second in the election.

Its leader, Alexis Tsipras, said Tuesday that Greece was no longer bound by its promises to cut spending sharply. But a failure to keep those promises could see international lenders cut off rescue funding, which would likely lead Greece to default.

Tsipras is not expected to be able to form a government and most observers think a second election will be called for June.

"If a new election is called, the probability of a (eurozone) exit rise substantially,'' observed Chandler.

Analysts warn that Greece could run out of money as soon as next month without a government to negotiate the next level of its bailout.

The commodity-sensitive Canadian dollar also suffered from commodity prices which continued to back off amid the European turmoil and signs of a slowing global economy.

The June crude contract on the New York Mercantile Exchange declined $1.06 to US$95.95 as barrel.

Prices are down from US$106 last week and were particularly pressured Wednesday by a report which showed U.S. crude supplies jumped more than expected last week, suggesting demand remains weak.

The American Petroleum Institute said late Tuesday that crude inventories rose 7.8 million barrels last week while analysts surveyed by Platts, the energy information arm of McGraw-Hill Cos., had predicted an increase of 2.2 million barrels.

Metal prices also fell, with the July copper contract in New York down five cents to US$3.63 a pound. Copper, viewed as an economic bellwether because it is used in so many industries, has fallen almost six per cent this month.

Bullion prices also retreated with the June contract down $19.50 to US$1,585 an ounce.

Market nervousness spread to Spain and Italy on Wednesday, with their government borrowing rates rising again. The yield on the 10-year Spanish bond was up 0.2 percentage points at 5.98 per cent while Italy's rose 0.15 percentage points to 5.51 per cent.

Those rates are considered manageable, for now, but it wouldn't take much of an increase for them to be considered unsustainable in the long-run.

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