The Canadian dollar closed sharply lower Wednesday as the U.S. dollar gained strength and commodities retreated amid doubts about whether Greece will get more money to stave off a default.
The loonie closed at the lows of the session, down 1.16 cents to 96.84 cents (U.S.).
A default by Greece or another country would send shockwaves through the global economy, particularly in Europe, and wreak havoc on the continent’s banking sector. Flagging demand due to economic weakness would undercut the price of Canadian-produced commodities, particularly oil, which is a major influence on the loonie as it is sold on the world market in U.S. currency.
Sentiment worsened on financial markets after German Chancellor Angela Merkel hinted that the second Greek bailout package might have to be renegotiated.
Ms. Merkel didn’t rule out altering the terms to the €109-billion ($147.6-billion U.S.) package, saying the decision must be based on how Greece’s debt inspectors, the so-called troika, judge Athens’ recent austerity efforts.
Meanwhile, a report in the Financial Times claimed as many as seven of the euro zone’s 17 members want the banks to take a bigger hit on their Greek bond holdings. Citing unnamed senior European officials, the newspaper said Germany and the Netherlands are at the forefront of the calls for the private sector to take a bigger hit. France and the European Central Bank are said to be fiercely resisting the move.
Uncertainty also remained high as euro zone countries hold votes to expand the powers of the EU’s bailout fund and consider what losses the private sector should bear for investments in Greek debt.
Earlier Wednesday, the Finnish Parliament approved expanding the euro zone’s bailout fund’s powers and increasing Finland’s share to €14-billion.
Under the new law, the bailout fund will be able to buy government bonds and lend money to a country before it is in a full-blown crisis.
Commodity prices slipped with the November crude oil contract down $3.24 to $81.21 a barrel after surging more than $4 on Tuesday.
The December copper contract on the Nymex gave back all of Tuesday’s 16 cent jump, off 19 cents to $3.25 a pound, its lowest close since August, 2010.
And the December gold contract in New York fell $34.40 to $1,618.10 an ounce.
The loonie has been stuck below parity since last week and the Bank of Montreal is predicting it could be a while before the currency makes it past that threshold.
BMO is predicting that the loonie will slip to as low as 93 cents by the end of the year. The bank says the global economic slowdown is expected to weigh on commodity prices, which have supported the loonie.
The bank expects the loonie to remain around that level until the second half of next year before global growth will help push it back to parity with the U.S. dollar.