Canadian dollar moves higher amid worsening eurozone economic downturn

TORONTO – The Canadian dollar closed higher Thursday amid data showing a deepening economic contraction in the eurozone.

The loonie was up 0.06 of a cent at 99.88 cents US 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 eurozone economy shrank by 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.

The eurozone has now contracted for three straight 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 by a quarterly rate of 0.6 per cent in the fourth quarter as demand for its exports fell.

“The Eurozone 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 US$97.31 a barrel.

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

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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