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Loonie closes higher as traders seek safety

Canadian dollars.

John Cowie/iStockphoto

The Canadian dollar closed slightly higher Tuesday amid a jump in gold prices as traders flocked to safe havens following the inconclusive result of the Italian elections on Sunday and Monday.

The loonie snapped a six-session losing run and moved up 0.12 of a cent to 97.43 cents (U.S.).

Traders avoided risk after Italy's national elections showed no clear winner and raised the possibility of a hung parliament. The worry is that the country will lack the political will to pass the tough reforms it needs to snuff out its economic crisis and prevent a new round of global financial turmoil.

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The centre-left coalition led by Pier Luigi Bersani appears to have won a narrow victory in the lower house of parliament while the Senate looks split with no party in control.

"With a worst-case scenario having been delivered from the Italian election results ... the outlook for Italy has weakened," said Scotia Capital chief currency strategist Camilla Sutton.

"In Italy, legislation is not passable without support from both the upper and lower houses; accordingly, uncertainty from Italian political developments are spurring fears of renewed uncertainty."

Heightened political uncertainty drove Italian 10-year bond yields to a three-month high of 4.76 per cent.

Commodities were mixed with the April crude contract on the New York Mercantile Exchange down 48 cents to $92.63 a barrel, its lowest close this year.

March copper gained 2 cents to $3.57 a pound and traders looking for safety pushed the April gold bullion contract $28.90 higher to $1,615.50 an ounce.

The loonie has fallen by about 2.5 cents in February amid worries about the strength of the housing sector and the price differential between benchmark Brent crude and Western Canadian Select from the oil sands.

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Traders are also concerned about U.S. economic strength, particularly as a March 1 deadline looms when more than $85-billion in across-the-board spending cuts will be triggered.

Also, the U.S. dollar gained strength last week amid concerns that the U.S. Federal Reserve may abandon its easy monetary policy sooner than many analysts have been predicting.

But Fed chairman Ben Bernanke told Congress Tuesday that the central bank's low-interest-rate policies are giving key support to an economy still burdened by high unemployment. He signalled that the Fed's efforts to keep borrowing costs low will continue.

Finally, the loonie was hit at the end of last week as lower-than-expected retail sales for December pointed to a weakening economy while tame inflation figures indicated the Bank of Canada won't be raising rates any time soon.

Traders looked ahead to Friday when Statistics Canada is expected to report that Canadian gross domestic product grew by 0.7 per cent at an annual rate in the fourth quarter. But it looks like growth started to flatten at the end of the year as the economy likely contracted by 0.1 per cent in December after rising 0.3 per cent in November.

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