The Canadian dollar plummeted more than a cent Wednesday and markets dove on concerns that China will curb bank lending and slow the economic recovery.

Traders were responding to a newspaper report that some Chinese banks have been ordered to stop lending for the rest of January after exceeding credit limits.

Traders are concerned China might curb bank lending. (Canadian Press)

The Canadian dollar closed down 1.51 cents to 95.51 cents US. Oil ended the day off $1.40 at $77.62 US a barrel. The February gold bullion contract on the Nymex closed down $27.40 to $1,112.30 US.

The markets also ended lower, although they had recovered somewhat from their bigger losses earlier in the day.

The S&P/TSX composite index in Toronto was down 84.1 points to 11,679.3.

The Dow Jones Industrial Average was off 122.28 points, or more than one per cent, at 10,603.15, and the Standard & Poor's 500 share index was down one per cent at 1,138.04.

The Nasdaq composite index ended down 29.15 at 2,291.25.

The Canadian dollar fell against the U.S. dollar, which strengthened as investors sought safety in American short-term debt. Traders also saw little cause for Canadian interest rates and the loonie to appreciate, after a report showing the annual inflation rate rose to 1.3 per cent, or less than expected, last month.

Scotiabank deputy chief economist Aron Gampel told CBC News that investors are now realizing their expectations about the rate of recovery and the growth in corporate earnings may have been overly optimistic.

"Even through the earnings growth is there, the expectations haven't been met," he said. "We've been raising the bar on expectations because the economy seems to be taking off and everyone's expecting profits to rebound quarterly, so any disappointment is having some impact on the outlook and clearly it takes some of the shine off of the markets and the currencies."

Slower Chinese growth affects Canada

Gampel said China's moves to slow growth send a signal that affects Canada's economy.

"If the Chinese economy slows, then the demand for commodities weakens," he said, and "the Canadian dollar looks to be a little weaker.

But Gampel doubted the move into the U.S. dollar will last, given the country's large debt.

"I think that the U.S. [dollar] longer term is likely to be a weaker currency as investors begin to diversify and really have legitimate concerns about the ability of the U.S. to pay back the big IOUs it's taking on right now," he said.

A top Chinese bank regulator said Wednesday China will slow its massive lending spree and step up monitoring of banks as it tries to prevent speculative bubbles in real estate and other assets. Liu Mingkang, chairman of the Chinese Banking Regulatory Commission, addressed a financial forum in Hong Kong.

With files from The Associated Press and The Canadian Press