TORONTO - The loonie weakened against the U.S. dollar on Monday, giving up early gains as it got caught in a flight from riskier assets sparked by the continuing investor retreat from emerging markets.
A combination of country-specific problems and expectations that the U.S. Federal Reserve will scale back its economic stimulus program kept pressure on emerging markets in a selloff that started last week.
The emerging-market concerns also weighed on equities and oil prices, while supporting the U.S. dollar. The search for safer assets had earlier boosted the loonie's appeal, but that did not last through the session.
"I think the emerging markets conditions and what sort of contagion that might have to other areas is weighing on currencies like Canada," said Don Mikolich, executive director of foreign exchange sales at CIBC World Markets in Toronto.
"Initially overnight, the Canadian dollar may have been a bit of a beneficiary of those flows, but as the day's gone on here, with no other Canada-centric information out there ... the Canadian dollar has been lumped in with the rest of it."
The Canadian dollar ended the North American session at $1.1112 to the greenback, or 89.99 cents US, weaker than Friday's close of $1.1073, or 90.31 cents US.
The currency, which has come under pressure in recent months, touched a 4-1/2-year low last week after dovish comments from the Bank of Canada.
Investor focus was turning toward the Fed's policy-setting meeting later this week. Markets are positioning for the Fed to reduce its stimulative bond-buying program by another $10 billion US a month, bringing it to $65 billion US a month.
"Anything in terms of differentiating from that, we'll definitely see currencies move, so if they decide to pull off more than the $10 billion US, we'll see the U.S. dollar gain strength," said Scott Smith, senior market analyst at Cambridge Mercantile Group in Calgary.
The loonie will likely be capped around $1.10 in the short-term, though a surprise from the Fed could see it strengthen to the mid-$1.09 area, said Smith. On the downside, the currency should find a floor at last week's lows around $1.1173 to $1.1175, he said.
The economic calendar is light except for gross domestic product figures for November, due out on Friday.
Federal government bond prices were lower across the maturity curve, with the two-year down 5 cents to yield 0.993% and the benchmark 10-year down 29 cents to yield 2.437%.