TSX loses 372 points

New worries about European debt sent Canada's largest stock exchange lower on Monday, as investors digested the increasing likelihood of a Greek default.

Loonie touches new 1-year low

The Nikkei average dropped 2 per cent on Monday, as fears of slowing global growth and the spreading impact of Europe's credit woes encouraged investors to pull funds out of risk assets. (Issei Kato/Reuters)

2 reasons for the greenback's rise:

It’s a fair question to ask why the U.S. dollar rose six per cent against other major currencies in September, as measured by the IntercontinentalExchange Dollar Index.

Why would investors flee to the "safety" of the currency backed by a government that owes $14 trillion US and represents an economy that may be on the edge of recession?

Economists at Edmonton-based ATB Financial took a run at that in a recent commentary.

1. In risky times, investors large and small move into assets with the greatest degree of certainty.

"America’s debt problem is very serious," ATB said, "but it is nothing like the problems in Greece in 2011, or even Lehman Brothers in 2008, both of which were out of money and out of options. Investors know that despite the credit rating downgrades this summer, the U.S. government ultimately has the wherewithal to meet its debt obligations."

2. When big investors such as pension funds get nervous and sell stocks, the proceeds have to go somewhere, and often they end up on their balance sheets as U.S. treasury bills.

All that buying of U.S. dollar denominated assets results in higher demand for the currency and so the price (or exchange rate) rises.

The fact is, the U.S. dollar is the best of a bad lot in terms of floating freely and reflecting a stable and diversified economy.

"As paradoxical as it seems," ATB said, "that leaves Washington as the last remaining bastion of stability.

Investors may be losing confidence in the U.S. economy, but they remain solidly confident the U.S. government will pay them back — at least for now."

New worries about European debt sent Canada's largest stock exchange lower on Monday, as investors digested the increasing likelihood of a Greek default.

The S&P/TSX composite index lost 371.98 points to close at 11,251.86. That was a drop of 3.2 per cent.

The loonie touched a new one-year low of 94.97 cents US during the day before closing at 95.14 cents US, down 0.26 of a cent. 

Oil dropped to its lowest level in more than a year, trading as low as $76.85, before closing down $1.59, or two per cent, at $77.61 US a barrel in New York.

In New York, the Dow Jones industrial average was 258.08 points, or 2.4 per cent, lower at 10,655.30, the Nasdaq composite index lost 79.57 points, or 3.3 per cent, at 2,335.83 while the S&P 500 index lost 32.19 points, or 2.9 per cent, at 1,099.23. 

Gold was buoyed by the bad news, with the price of an ounce of bullion for December delivery increasing $35.40 to close at $1,657.70 US an ounce. Gold tends to perform well during times of market turbulence and uncertainty.

Worries about Greece came to the fore after the government said the country's economy will remain in recession next year, causing it to miss its original deficit reduction targets.

Debt inspectors from the International Monetary Fund, European Central Bank and European Commission, known as the troika, are in Athens reviewing reforms to see if Greece qualifies to receive the next €8 billion instalment of its bailout. Without it, Greece will run out of funds in mid-October.

A default would have serious repercussions for the European banking system and likely derail what is already a fragile economic recovery and send it into recession.

A recession would lower demand for oil, copper and other resources Canada produces. That would weaken exports and squeeze profits in Corporate Canada — eroding a main driver of share prices on the resource-heavy TSX.

"The commodity market is really tied to the global economic recovery and so when we see a slowdown globally, it obviously impacts Canada," said Sadiq Adatia, chief investment officer at Sun Life Global Investment.

"We'll see commodities bounce back at some point in time but just like anything else, when there's a global slowdown, everything gets impacted and commodities will get its fare share of that."

A draft of the country's 2012 budget says Greece's debts are projected to reach 172.7 per cent of gross domestic product in 2012 while the deficit will drop to 6.8 per cent. That's an improvement, but still higher than the 6.5 per cent originally agreed with international bailout creditors.

"It's actually not a surprise," Adatia said, "because this is what the EU has been talking about in terms of getting additional funding — they said [Greece] hasn't lived up to their previous promises."

"Greece hasn't convinced itself it needs to do more," he said.

With files from The Canadian Press