Loonie slides on political impasse in Greece

Canadian one dollar coins, also know as loonies. (REUTERS/Shaun Best)

Canadian one dollar coins, also know as loonies. (REUTERS/Shaun Best)

Claire Sibonney, REUTERS

, Last Updated: 3:48 PM ET

TORONTO - The Canadian dollar erased earlier gains against its U.S. counterpart on Tuesday but surged to a 16-month high against the euro after Greece said it would hold new elections and worries mounted about its possible exit from the euro zone.

Attempts to form a government in Greece collapsed on Tuesday, jolting financial markets at the prospect leftists opposed to the terms of an EU bailout could sweep to victory in a June vote.

Against the euro however, the Canadian currency rallied to C$1.2778, or 78.26 euro cents, its strongest level since January 2011.

"A lot of traders are looking to trade the CAD versus the crosses like the pound, the yen and the euro versus dollar/CAD by itself," said Gareth Sylvester, senior currency strategist at risk management firm Klarity FX in San Francisco.

Against the U.S. dollar, the Canadian currency hit a low of C$1.0060 versus the greenback, or 99.40 U.S. cents, keeping Canada's dollar within the confined range that it's been stuck in since early this year.

"In terms of potential movements and potential profits, they're well defined so there's a lot of jobbing in the market place," added Sylvester, noting traders will want to sell the U.S. dollar versus Canada around C$1.0050 and buy it towards C$0.9850.

At 2:02 p.m. EDT, the Canadian dollar stood at C$1.0038 versus the U.S. dollar, or 99.62 U.S. cents, slightly weaker than Monday's North American session finish at C$1.0029 versus the U.S. dollar, or 99.71 U.S. cents.

"It's the great sideways trade of 2012 that continues unabated," said Jack Spitz, managing director of foreign exchange at National Bank Financial.

Earlier in the session, the Canadian dollar was on firmer ground on the back of surprisingly strong growth data from Germany.

Investors will look to Canadian inflation data for April at the end of the week for more significant direction, watching for any clues on the Bank of Canada's next tightening move.

"If core inflation is above 2 percent it adds to the suggestion that the Bank of Canada is going to be one of the leading central banks in terms of pulling back excessive accommodation, so it could inspire some more Canadian dollar bids," added Spitz.

According to a Reuters poll however, Canadian consumer prices likely remained subdued in April, leaving the annual inflation rate unchanged from March when it dropped to an 18-month low of 1.9 percent, and suggesting price pressures are the least of the Bank of Canada's worries.

Canadian government bond prices were lower, despite the risk-averse tone in markets, tracking U.S. Treasuries as traders booked profits from an eight-week run-up.

The two-year government bond was down 4 Canadian cents to yield 1.292 percent, while Canada's 10-year bond lost 10 Canadian cents to yield 1.946 percent.