CANADA FX DEBT-Europe fears send C$ to 16-week low

Wed May 16, 2012 8:23am EDT

* C$ hits C$1.0031 vs US$, or 98.71 U.S. cents
    * Weakest level since Jan. 25
    * Bond prices edge lower across the curve

    By Claire Sibonney	
    TORONTO, May 16 (Reuters) - The Canadian dollar hit a
16-week low against the U.S. dollar on Wednesday as fears of a
Greek exit from the euro zone and a worsening debt crisis facing
other European nations gripped financial markets.	
    Expectations that Greece could leave the 17-member currency
bloc increased markedly after political leaders in Athens failed
to form a government on Tuesday, forcing another round of
elections. Opinion polls show this is likely to be won by
leftist parties opposed to the country's bailout deal.
 	
    A Greek departure from the euro zone would have a
potentially huge knock-on effect on struggling economies such as
Italy and Spain, whose bond yields climbed above the crucial 6
percent mark in the previous session.	
    "The problems in Europe are certainly escalating and causing
a lot of stress in the markets and I think the Canadian dollar
will unfortunately be sideswiped," said Blake Jespersen,
managing director of foreign exchange sales at BMO Capital
markets.	
    Overnight, the currency slipped as far as C$1.0131, or 98.71
U.S. cents, its weakest level since Jan. 25.	
    By 8:07 a.m. (1207 GMT), the Canadian dollar 
recovered somewhat to  C$1.0080 versus the U.S. dollar, or 99.21
U.S. cents, still down from Tuesday's North American session
close at $1.0068 versus the U.S. dollar, or 99.32 U.S. cents.	
    Jespersen noted that Canadian clients have been waiting for
a pop higher in the U.S. dollar to sell greenbacks, helping the
domestic currency cut some of the day's losses. 	
    Over the next month however, he said the Canadian dollar
could tumble as far as C$1.03.	
    "The Greek election isn't until June 17 so the markets have
to wait a month for that unless we get some kind of ECB bailout
between now and then. I think the problems in Europe could
continue to escalate and it is causing a flight to quality," he
said. 	
    "I think it's only a matter of time that our dollar will
start to play a little bit of catch-up with the selloff in other
asset classes."	
    Canadian bond prices edged lower across the curve. The
two-year government bond was down 3 Canadian cents to
yield 1.306 percent, while Canada's 10-year bond 
lost 16 Canadian cents to yield 1.953 percent.
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