TORONTO - The Canadian dollar closed lower Wednesday as relief over the emergence of a clear-cut winner in the U.S. presidential contest turned to pessimism that Democrats and Republicans can find common ground and stop a string of tax hikes and spending cuts from taking effect at the end of the year.
Investors worry this so-called fiscal cliff scenario would send the U.S. into a severe recession, at the same time dragging down other economies around the world, including Canada's.
The currency lost 0.44 of a cent to 100.39 cents US after rising 0.5 of a cent on Tuesday as weak European data also contributed to increased risk aversion to resource-based currencies such as the loonie and pushed the greenback to a two-month high.
Barack Obama won by a large margin in electoral college votes although the popular vote count was much closer. Democrats kept control of the Senate while Republicans retained control of the House of Representatives.
"The dead heat on the popular vote (based on current declarations) is hardly a sweeping mandate and is likely to leave the Republicans in no mood for compromise on tax and spending policy," said Adam Cole, Head of G10 FX Strategy at RBC Europe Ltd.
But traders were also focused overseas after the European Union downgraded its economic forecasts, saying it now expects the gross domestic product of the 27-country region to contract by 0.3 per cent on an annual basis this year, rather than remaining flat as it predicted in the spring.
It also said that the 17 countries that use the euro currency will see their GDP fall 0.4 per cent, against a previous expectation of a 0.3 per cent contraction.
And Germany’s panel of independent economic advisers said that country’s economy, which is Europe’s biggest, will grow by only 0.8 per cent next year. The government last month lowered its own 2013 growth forecast to one per cent from 1.6 per cent.
Greece was also back in focus ahead of a crucial vote in its parliament later in the day that could determine whether the country stays in the eurozone.
If legislators don’t back a €13.5-billion package of spending cuts and tax increases, the country faces the prospect of losing access to its bailout lifeline and potentially defaulting on its mountain of debt and leaving the monetary union.
The grim market mood extended to commodities as the December crude contract on the New York Mercantile Exchange lost $4.27 to US$84.44 a barrel. The higher U.S. dollar also pressured commodities because a stronger greenback makes it more expensive for holders of other currencies to buy oil and metals which are dollar-denominated.
December copper shed seven cents to US$3.44 a pound while December gold bullion was off $1 to US$1,714 an ounce.