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Canada’s Dollar Weakens as Europe Concern Crimps Risk Demand

Oct. 11 (Bloomberg) -- Canada’s dollar fell versus the greenback as concern that European officials may fail to halt the region’s sovereign-debt crisis before it spreads to banks cut demand for currencies tied to growth.

The Canadian dollar rose yesterday by the most in two months against its U.S. counterpart after Germany and France vowed to deliver a plan to support the region’s banks. The currency gave back some of those gains today as Slovakian lawmakers failed to approve an overhaul of Europe’s bailout fund, pushing potential approval to a second vote.

“The Canadian dollar is not really catching too much steam,” said Brian Kim , a currency strategist in Stamford, Connecticut, at Royal Bank of Scotland Group Plc, by e-mail. “Risk-on is meek at best.”

The currency fell 0.4 percent to C$1.03 per U.S. dollar at 5 p.m. in Toronto. It weakened the as much as 0.8 percent, the largest drop since Oct. 4 and rose 1.3 percent yesterday, the most since Aug. 9. It weakened to C$1.0658 on Oct 4, the lowest in more than a year. One Canadian dollar buys 97.09 U.S. cents.

The loonie, as the currency is sometimes known, remained lower after Canada Mortgage & Housing Corp. reported on its website that housing starts were 205,900 at a seasonally adjusted annual pace in September. Economists forecast a reading of 190,000 according to the median of 19 responses to a Bloomberg News survey.

Bonds Drop

Canada’s government bonds dropped, pushing the yield on the two-year benchmark note up two basis points, or 0.02 percentage point, to 0.98 percent. The 1.5 percent securities maturing in November 2013 declined 4 cents to C$101.05.

After appreciating to a three-year high of 94.07 cents on July 26, the Canadian currency weakened as investors pared riskier positions in favor of U.S. dollar safety. It lost 6.9 percent in September, the most in almost three years, as volatility surged on speculation European officials will fail to contain the region’s debt crisis.

Slovak lawmakers failed to approve an overhaul of Europe’s bailout fund, toppling the government and leaving the euro area’s second-poorest member with the need to repeat the vote to pass the mechanism.

Europe Watch

Smer, the largest opposition party in Slovakia, which didn’t back the legislation, will support the changes in a second vote, ensuring it will pass, party leader Robert Fico told reporters in the capital Bratislava. While no date has been set for a new vote, Finance Minister Ivan Miklos said the revamped European Financial Stability Facility will likely be passed this week.

Slovakia is the only country in the 17-nation euro area that hasn’t ratified the measures.

“Risk aversion is still very high,” said Camilla Sutton, head of currency strategy at Bank of Nova Scotia in Toronto, in a telephone interview. “It’s really just what’s transpiring in Europe. The Canadian dollar is vulnerable to following the broader trends.”

Crude futures were little changed at $85.29 a barrel today after falling as much as 2.1 percent. The Standard & Poor’s 500 Index ended up 0.1 percent after dropping as much as 0.6 percent.

Traders trimmed bets that the Canadian dollar will decline against the U.S. dollar, Oct. 7 data from the Washington-based Commodity Futures Trading Commission show.

Futures Bets

The difference in the number of wagers by hedge funds and other large speculators on a decline in the Canadian dollar compared with those on a gain -- so-called net shorts -- was 15,682 on Oct. 4, compared with net shorts of 20,550 a week earlier. Futures are agreements to buy or sell asses at a set price and date. The figures reflect holdings in currency-futures contracts at the Chicago Mercantile Exchange.

“There’s cautious optimism for the moment on the Canadian dollar,” Michael Leavitt, an institutional-derivatives broker at MF Global Canada Co. in Montreal, said by e-mail. “Europe is still leading the charge globally. C$1.02 to C$1.06 is the new range established over the last two weeks.”

Canada’s currency will strengthen to C$1.02 versus the U.S. dollar by year-end, according to the median forecast of 36 economists and analysts compiled by Bloomberg. The median forecast from a month ago was for the loonie to end 2011 at 98 cents per U.S. dollar.

“This risk is that we see dollar-Canada moving higher than the high last week,” said Scotia Capital’s Sutton. “That would put dollar-Canada in the very near term above C$1.0658. If we look out to year-end, Canada should have retraced some of these losses and be moving back towards parity.”

To contact the reporter on this story: Chris Fournier in Halifax, Nova Scotia at

To contact the editor responsible for this story: Dave Liedtka at

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