08/28/2013 08:34 EDT | Updated 10/28/2013 05:12 EDT

Loonie lower, traders avoid risk on worries about possible intervention in Syria

TORONTO - The Canadian dollar closed lower Wednesday as the prospect of a U.S.-led military strike on Syria sent investors out of riskier assets such as commodity based currencies and into the perceived safe haven of the American dollar.

The loonie fell 0.1 of a cent to 95.37 cents US.

Worries about an attack grew after the United Nations’ special envoy to Syria said evidence suggests that some kind of chemical "substance" was used in Syria that may have killed more than 1,000 people.

However, Lakhdar Brahimi added that any military strike in response must first gain UN Security Council approval.

His comments came as a UN inspection team was investigating an alleged poison gas attack near Damascus on Aug. 21.

The loonie failed to benefit from oil prices which moved to the highest level in over two years on supply disruption concerns.

The October contract on the New York Mercantile Exchange was off early highs but still up $1.09 to US$110.10 a barrel, its highest close since May, 2011, despite data showing an unexpected rise in crude inventories last week.

"Spikes in oil prices on the back of risk aversion is not a particularly supportive environment for the Canadian economic backdrop," explained Scotia Capital chief currency strategist Camilla Sutton.

"When oil prices shift higher on the back of strong global growth and rising demand, (the dollar) tends to benefit as this environment supports Canadian fundamentals on several fronts. We are not in this environment and accordingly rising oil prices have been ignored by most Canadian dollar traders."

Elsewhere on commodity markets, gold prices erased early gains. The December bullion contract lost $1.40 to US$1,418.80 an ounce after risk aversion sent prices surging $27 on Tuesday.

Gold has also been in demand through its status as a haven in times of geopolitical uncertainty. Earlier, it had hit a three-month high of US$1,434.

Copper prices declined, with the September contract down three cents to US$3.30 a pound.