05/16/2012 08:44 EDT | Updated 07/16/2012 05:12 EDT

Greek political turmoil leaves loonie at lowest level since January

TORONTO - The Canadian dollar closed at a four-month low Wednesday as concern over a possible Greek exit from the eurozone continued to weigh on investors' appetite for risk.

The loonie fell 0.57 of a cent to 98.75 cents US, its lowest close since Jan. 20, as investors continued to avoid risky assets such as equities and commodities in favour of perceived safe havens such as U.S. Treasuries.

"It’s very much related to Greece and Europe," said Aroop Chaterjee, foreign exchange strategist at Barclays Capital.

"The political uncertainty has gone up, the volume on some of the conversations about a Greek exit has gone up as well and that’s causing concern to investors ... Financial and government sector losses on a Greek exit would be fairly large, estimates I’ve seen put it at close to half a trillion dollars."

Greece has weighed heavily on financial markets since an inconclusive election May 6 left no party with enough votes to form a government. Nine days of talks failed to produce a coalition government and Greeks will go back to the polls on June 17.

Greek TV also reported Wednesday that Council of State head Panagiotis Pikramenos will be appointed interim prime minister. The interim government will not be able to make any internationally binding decisions.

Many Greeks voted for parties that had been on the fringe of the political spectrum and which want to see the country abandon the tough austerity measures adopted in return for the huge international bailouts that are propping up Greece.

Without agreeing to another round of austerity measures, it’s conceivable that Greece’s partners in the eurozone will withhold the next round of bailout cash. An exit from the euro might then become inevitable.

If Greece leaves the euro, it would set a precedent that might be taken up by other countries burdened by high debt levels.

Those worries have resulted in investors demanding higher returns for bonds from Spain and Italy.

The yield on Spain’s 10-year bond, a gauge of investor concern, was up at 6.33 per cent, while Italy’s rose to 5.85 per cent. Though down on the levels they hit last November, the two rates are uncomfortably near the seven per cent level widely considered to be unsustainable in the long run.

The Canadian dollar failed to find lift from manufacturing data for March that came in better than expected. Statistics Canada reported that manufacturing sales increased 1.9 per cent in March to $49.7 billion, the largest advance since September 2011. The gain was led by the petroleum and coal products industry and was much better than the 0.3 per cent gain economists had expected.

The flight from risk continued to drive commodities lower since no one knows how much damage a chaotic Greek exit from the eurozone would have on the broader global economy. But a higher U.S. dollar has also hammered prices for oil and metals. That's because prices are denominated in U.S. dollars and a higher greenback makes oil and metals more expensive for holders of other currencies.

The June crude contract on the New York Mercantile Exchange lost $1.17 to US$92.81, its lowest level since last November.

Copper prices also continued to slide with the July contract down another four cents at US$3.48 a pound, its lowest level since early January. The metal, viewed as an economic barometer since it is used in so many industries, has plunged 10 per cent this month.

Investors also sold off bullion, which was down $20.50 to US$1,536.60 an ounce, a price not seen since last July.