08/21/2012 08:48 EDT | Updated 10/21/2012 05:12 EDT

Loonie lower, bounces off fresh 3 1/2 month high amid higher commodities

TORONTO - The Canadian dollar closed lower Tuesday after hopes for an improvement in the eurozone debt crisis sent the currency to a fresh 3 1/2-month high.

The commodity-sensitive loonie had earlier benefitted from higher prices for oil and metals but closed down 0.13 of a cent to 101.04 cents US. The currency had ran up as high as 101.6 cents US amid optimism that moves will be made to lower the borrowing costs of deeply indebted European countries.

That had encouraged traders to take on riskier assets such as commodities, equities and resource-based currencies such as the Canadian currency.

There is a growing conviction that the European Central Bank will buy government bonds as a way to reduce borrowing costs, which had spiked earlier this year to unsustainable levels in countries such as Spain and Italy. The German central bank, the Bundesbank, is alone in opposing such a move and some traders are betting that a compromise will be reached.

Optimism about resolving the eurozone debt crisis spread to bond markets Tuesday morning as Spain’s Treasury sold €4.4 billion in a short-term debt auction that saw interest rates down sharply.

It sold €3.5 billion in 12-month bills at an average interest rate of 3.07 per cent compared with 3.92 per cent last month. It also sold €981 million in 18-month bills on a yield of 3.33 per cent, down from 4.24 per cent.

Borrowing costs have also fallen amid growing speculation that Spain, which is mired in deep recession, will seek a bailout.

The country has said it would consider such a move if the conditions were reasonable.

The September crude contract on the New York Mercantile Exchange gained 71 cents to US$96.68 a barrel.

The September copper contract on the Nymex reversed Monday's five-cent loss, climbing eight cents to US$3.45 a pound.

December bullion rose $19.90 to US$1,642.90 an ounce.