The Canadian dollar tumbled Tuesday after Greece shocked financial markets with plans to hold a referendum on a European bailout for its debt-ridden economy.
The loonie fell 2.18 cents (U.S.) to 98.15 cents after going as low as 97.96 cents as traders piled into the safe haven status of the U.S. dollar after Greek Prime Minister George Papandreou made the announcement late Monday. The slide came five days after the dollar closed above parity with the U.S. dollar for the first time since Sept. 20.
The vote could determine whether Greece remains in the euro currency union.
There has been widespread opposition among many ordinary Greeks to the debt deal, which would require the country to cut tens of thousands of public sector jobs, boost taxes and sell off government companies and other assets.
In return, it would get new loans from European authorities and the banks would lose a big chunk of the value of their old bonds. Many observers fear a Greek debt default could lead to tens of billions of dollars in losses at European banks who hold the country's bonds.
That would squeeze bank lending to consumers and businesses and lead to a European recession, which could spill over into the rest of the world, including Canada.
The announcement came just days after European officials outlined a plan to deal with the region's debt crisis.
The three-pronged strategy involved boosting the bailout fund, getting private creditors to take a bigger hit on their Greek debt holdings and forcing the banks to raise more capital.
Market optimism about the plan started to wear thin Monday as analysts looked for more specific details on how the plan would work. That vanished after Mr. Papandreou's announcement on worries the Greek government could lose the referendum vote with the potentially devastating consequence of a disorderly debt default and Greece's exit from the common currency.
"The relief that was sweeping over Europe has been replaced with a jump in uncertainty," said Scotia Capital chief currency strategist Camilla Sutton.
"This political nightmare might actually seal Greek's fate and push it out of the European Monetary Union."
The referendum is expected to be held early next year.
The higher U.S. dollar and worsening demand prospects sent commodity prices lower. But prices were off early lows on reports that the referendum might not take place. CNBC cited a Greek Socialist party official as saying Mr. Papandreou's referendum call is "basically dead."
A stronger greenback usually helps depress commodity prices, which are denominated in dollars, as it makes oil and metals more expensive for holders of other currencies.
The December crude contract on the New York Mercantile Exchange fell $1 to $92.19 a barrel.
Metal prices also retreated as the December copper contract in New York dropped 13 cents to $3.50 a pound. Gold bullion fell $13.40 to $1,711.80 an ounce.
Risk appetite was further dulled by data showing weaker than expected manufacturing growth in China as a government industry group reporting the slowest growth in nearly three years.
The China Federation of Logistics and Purchasing said Tuesday that its monthly purchasing managers index fell an unexpectedly large 0.8 percentage point to 50.4, just above the 50-level that signifies expansion. It forecast the economy would continue to slow in the last months of the year.
China's huge appetite for commodities has driven prices for oil and copper sharply higher. Its growth is seen as critical in supporting a fragile global economic recovery.