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The Canadian dollar closed sharply lower Wednesday as oil prices fell amid worries of fallout from a failure of the U.S. to raise its debt limit and data showing a surprising jump in American crude inventories.
The loonie was also pressured by late-day strength in the American currency, falling 0.68 cents to $1.0539 (U.S.).
Currency markets were cautious amid frustration that lawmakers appear no closer to solving the standoff in Washington over raising the U.S. debt ceiling.
The United States has until Aug. 2 to reach a deal to increase its $14.3-trillion debt limit or face not being able to pay its bills. That has led to fears the country could default on its financial obligations, which could send shockwaves through financial markets.
"Both sides are hardening their stance," said Azim Hajee, senior trader at futures trader Lind Waldock.
But even if a deal is reached, there are fears the U.S. could still lose its top credit rating, which would lead to much higher interest payments.
"It would have a snowball effect into the consumer market, the housing market, things are going to get more expensive and companies would pass that on to the consumers," added Hajee.
Oil prices were already low early in the session and losses picked up after the U.S. Energy Information Administration said oil inventories rose 2.3 million barrels last week, against a decline of one-to-two million barrels that analysts had expected. Gasoline inventories rose one million barrels. The September contract on the New York Mercantile Exchange tumbled $2.19 to $97.40.
Bullion prices backed off $1.70 from Tuesday's latest record close to $1,615.10 an ounce.