Nov. 25 (Bloomberg) -- Canada’s dollar dropped to its lowest level in more than seven weeks against its U.S. counterpart as rising Italian borrowing costs spurred concern that the euro zone’s debt crisis is worsening.
The currency declined for a second straight week before reports next week on gross domestic product and employment growth. Stocks and crude oil, two of the Canadian dollar’s primary drivers, also lost for the week as government-bond yields traded at almost record lows.
“The whole environment is very negative for risk,” said Jose Wynne, head of North America foreign-exchange research at Barclays Plc’s Barclays Capital unit, by phone from New York. Commodity currencies such as the Australian and Canadian dollars are “taking it badly,” he said, predicting the Canadian currency will weaken to C$1.10 by year-end.
Canada’s currency, also known as the loonie, was little changed at C$1.468 per U.S. dollar at 5 p.m. in Toronto, after touching C$1.0524, the lowest since Oct. 5. One Canadian dollar buys 95.53 U.S. cents.
The currency reversed losses and rose as much as 0.3 percent versus the greenback after Dow Jones and Reuters reported there may be changes to the European Stability Mechanism, due to come into force in 2013, which would eliminate the clause on private-sector involvement in future bailouts.
“We’ve come a long way in a little while as people have hopped on the risk-aversion band wagon,” said John Curran, a Toronto-based senior vice president at CanadianForex Ltd., an online foreign-exchange dealer, said in a telephone interview. “You’re probably seeing a little bit of profit taking.”
European leaders persuaded bondholders last month to accept a 50 percent loss on their holdings of Greek debt as part of an interim rescue effort.
Italy sold 8 billion euros ($10.6 billion) of 183-day bills at a rate of 6.504 percent, the highest since August 1997 and up from 3.535 percent at an Oct. 26 sale. Demand dropped to 1.47 times the amount on offer, from 1.57 times last month. An index of consumer sentiment in France, the euro area’s second-largest economy, slid to 79 this month from 82 in October, according to Insee, the national statistics office.
“We had an Italian bond auction which went not so well,” said Hidetoshi Honda, a currency strategist at Mizuho Corporate Bank Ltd. in London, in a telephone interview. “The sentiment towards European sovereign debt is sliding ever lower. That’s the biggest reason behind the ongoing risk aversion.”
Canadian Finance Minister Jim Flaherty said Europe’s debt crisis is creating “contagion” outside the region and policy makers must act while the situation can still be “stabilized.”
“Again today, we are staring a crisis in the face,” Flaherty said in the text of a speech today in Toronto. “The crisis remains far from resolved.”
Canadian government bonds fell for a second day, pushing the 10-year note’s yield up four basis points, or 0.04 percentage point, to 2.09 percent. It reached a record low 1.994 percent on Oct. 4.
The price of the 3.25 percent security due in June 2021 fell 40 cents to C$109.96. Canada’s 10-year bonds yield about 13 basis points more than equivalent-maturity U.S. Treasuries.
The cost for European banks to fund in dollars reached a three-year high. Three-month cross-currency basis swaps, the rate banks pay to convert euro payments into dollars, fell as much as 1.61 percentage points below the euro interbank offered rate, the most expensive since October 2008, data compiled by Bloomberg show.
The loonie has weakened 3.5 percent this year, according to Bloomberg Correlation-Weighted Currency Indexes, a gauge of 10 developed-nation currencies. The greenback has gained 2.2 percent while the euro has added 1.4 percent.
--Editors: Kenneth Pringle, Greg Storey
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