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Loonie ends higher on worsening euro zone news

File photo of sculpture showing the euro currency sign in front of the European Central Bank (ECB) headquarters in Frankfurt.


The Canadian dollar closed higher Thursday amid data showing a deepening economic contraction in the euro zone.The loonie ended up 0.06 of a cent at 99.88 cents (U.S.) as the data also showed that Germany is beginning to crack under the weight of worsening conditions in the monetary union.

Eurostat, the EU's statistics office, said Thursday that the euro zone economy shrank 0.6 per cent in the final quarter of 2012 from the previous three-month period.

The decline was bigger than the 0.4 per cent drop expected by markets and represented the biggest fall since the first quarter of 2009 when the global economy was in its deepest recession since the Second World War.

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The euro zone has now contracted for three successive quarters, weighed down by weak, debt-laden countries such as Greece and Spain, where governments have been aggressively increasing taxes and cutting spending.

Equally worrisome was worsening conditions in Europe's biggest economy. The German economy shrank 0.6 per cent in the fourth quarter as demand for its exports fell.

"The euro zone economies are weaker than expected, complicating the outlook for Europe, reviving fears that there are still significant hurdles ahead and raising the potential that the European Central Bank will need to be more accommodative," observed Scotia Capital chief currency strategist Camilla Sutton.

On the commodity markets, the March crude contract on the New York Mercantile Exchange gained 30 cents to $97.31 a barrel.

April gold bullion declined $9.60 to $1,635.5041.30 an ounce while copper for March was unchanged at $3.74 a pound.

Meanwhile, traders looked ahead to a key meeting of the Group of 20 finance ministers this weekend.

Exchange rates and the threat of a "currency war" are expected to feature heavily at the meeting.

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Attention has been recently centred on the Japanese yen, which this week dropped to its lowest against the U.S. dollar since May, 2010.

Earlier this week, finance ministers from the Group of Seven industrialized countries pledged to refrain from intentionally weakening their currencies. Finance ministers said they remained committed to exchange rates driven by the market, not government or central bank policies.

Traders interpreted the statement as a message directed at Japan, where the yen has plummeted against the U.S. dollar since Prime Minister Shinzo Abe took office and pushed the country's central bank to further relax its monetary policy.

At the same time, the euro has been strengthening lately, which further hampers an economic recovery for Europe.

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