Canadian Dollar Drops From Highest in Almost a Month on European Concern

The Canadian dollar fell from its highest level in almost a month versus its U.S. counterpart as concern Europe’s debt crisis is worsening made higher-yielding assets including stocks less attractive.

The loonie, as the currency is known for the image of the bird on the C$1 coin, dropped for the first time in three days. The Canadian dollar gained the most yesterday in two weeks as evidence of U.S. and Chinese manufacturing strength spurred speculation the global economy will weather the turmoil in the European Union.

“The EU situation is again rearing its head, reminding people of one of the key risks for 2012,” said David Watt, senior currency strategist in Toronto at Royal Bank of Canada’s RBC Capital Markets unit, in a telephone interview. “We’re seeing a fading of the risk rally to start the year.”

The loonie depreciated 0.2 percent to C$1.0127 per U.S. dollar at 5 p.m. Toronto time. One Canadian dollar buys 98.75 U.S. cents. The Canadian currency advanced 0.8 percent yesterday in the biggest gain in two weeks. It touched C$1.0077, the strongest level since Dec. 8.

Canadian 10-year government bonds (G0C0) were little changed, with the yield (.USCAD10) rising less than one basis point, or 0.01 percentage point, to 1.99 percent, compared with 1.94 percent at the end of 2011. The price of the 3.25 percent security maturing in June 2021 decreased 6 cents to C$110.75.

Bond Yield Spread

The 10-year securities yielded (.USCAD10) one basis point more than equivalent-maturity U.S. Treasuries, compared with a spread of 32 basis points on Sept. 5, the most in 2011.

“It’s a risk-off day,” Neil Mellor, a strategist at Bank of New York Mellon Corp., said by phone from London. “The hurdles that the euro has to overcome over the next few weeks are huge. It does point to a positive U.S. dollar view,” at the expense of higher-yielding currencies such as the Canadian dollar, Mellor said.

Jack Spitz, managing director of foreign exchange at National Bank of Canada in Toronto, cited in a note to clients weak demand for German bonds at auction today and record spread levels in Hungarian credit-default swaps as reasons for the latest bout of risk aversion.

The euro dropped to the lowest in almost a year versus the Canadian dollar after demand at the German auction of 10-year bonds was below the average over the past five years. The Canadian dollar appreciated as much as 0.8 percent to C$1.3080 versus the euro, the strongest since January 2011.

Loonie’s 2011 High

The Canadian dollar touched 94.07 cents per U.S. dollar on July 26, the strongest level in more than three years, on prospects for higher interest rates (CABROVER) and as investors sought shelter from the U.S. debt-ceiling debate in Congress.

The loonie then fell, touching C$1.0658 on Oct. 4, the weakest in more than a year, as the euro region’s debt crisis sapped demand for higher-yielding assets.

“The U.S. dollar is underperforming to start the year based on little other than hope -- which is now being squashed - - that the EU situation is going to miraculously fix itself in 2012,” said RBC’s Watt. “Sovereign news out of Spain and banking news out of Italy suggests that there’s still a lot of difficult work that has to be done before we can have any confidence of financial and sovereign stability.”

Italian Bank

The euro slid versus most major peers after El Pais newspaper said the Spanish government helped the Valencia region make an overdue payment to Deutsche Bank AG. Stock of UniCredit SpA, Italy’s largest lender, slid the most in more than two decades after the company set a 43 percent price discount for shares in a rights offering to raise 7.5 billion euros ($9.7 billion).

With a drop of 3.3 percent over the past year, the Canadian dollar is the biggest loser among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Currency Indexes. The loonie has gained 1.4 percent in the past month on speculation the U.S. economy will recover from its torpor, trailing the performance of the yen and the dollars of Australia and New Zealand.

To contact the reporter on this story: Chris Fournier in Halifax, Nova Scotia, at cfournier3@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka dliedtka@bloomberg.net

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