05/14/2012 09:08 EDT | Updated 07/14/2012 05:12 EDT

Canadian dollar lower as traders avoid risk amid growing eurozone worries

TORONTO - The Canadian dollar closed lower Monday as traders opted for safety amid the failure of Greece to form a government despite moves by China to relax lending in order to encourage growth.

"The Canadian dollar is weaker ... and weighed down by broad-based risk aversion," said Scotia Capital currency strategist Eric Theoret.

"In this environment, commodities are weak. The currency remains vulnerable in periods of risk aversion. Near-term movement ... will be driven by risk aversion in the absence of domestic data."

The commodity-sensitive loonie lost 0.2 of a cent to 99.71 cents US as traders avoided assets such as oil and metals and resource-based currencies such as the Canadian dollar — instead they bought into the perceived safe haven of U.S. Treasuries.

Worries about the European debt crisis were front and centre as it looked increasingly likely that Greeks would head back to the polls next month after the May 6 election failed to produce an outright winner.

The second-placed left wing party, Syriza, has refused to join a coalition, demanding that the terms of an international bailout be scrapped or radically renegotiated.

Greece’s president called a meeting of party leaders in yet another attempt to form a coalition but Syriza leader Alexis Tsipras has said he won’t attend.

Investors fear that because Greeks voted heavily in favour of parties that want to either cancel or renegotiate Athens’ international bailout, the country may be forced to default and, ultimately, leave the eurozone.

Nobody knows how catastrophic that could be for Europe or the global economy.

Commodity prices failed to find lift from a weekend move by China's central bank to cut bank reserve requirements by 50 basis points following Friday’s release of disappointing economic data. Scotia Capital's Theoret observed that such a move would normally be expected to support risk appetite.

The reserve cut is expected to free more than 400 billion yuan (US$63.4 billion) in financing.

Prices for oil and metals have been buffetted by indications of slowing economic conditions, particularly in China. Its huge appetite for commodities has sent resource prices sharply higher. But growth has slowed as Beijing deals with high inflation.

The June crude contract on the New York Mercantile Exchange fell $1.35 to US$94.78 a barrel Monday, down sharply from US$106 at the beginning of May and its lowest close since just before Christmas.

July copper was off nine cents to US$3.55 a pound, the metal's lowest settlement since mid-January and down 7.5 per cent from May 1. June gold lost $23 to US$1,561, its lowest close since late December.

Meanwhile, Spain, which is considered the next most likely European country to need a bailout, managed to raise €2.9 billion in a short-term bond auction on Monday. But concerns over the future of the euro currency union pushed investors to demand higher interest rates to lend the money and caused the Madrid stock market to plummet.

The Treasury paid a rate of three per cent to sell €2.2 billion in 12-month notes, compared with 2.6 per cent in the last such auction April 17. It paid 3.3 per cent to sell €711 million in 18-month notes, up from 3.1 per cent.