Dollar falls on Europe worries

The Canadian dollar fell by more than a cent Thursday on disappointment that the European Central Bank has no plans for large-scale government bond purchases, to help drive down the borrowing costs of deeply-indebted eurozone members.

The loonie closed down 1.19 cents at 97.79 cents US.

Markets also dropped ahead of a crucial summit of European Union leaders in Brussels Friday which is aiming to find a convincing solution to the European debt crisis.

The S&P/TSX composite index tumbled 196.94 points, or 1.6 per cent, to 11,951.79.

In New York, the Dow Jones industrials were off 198.67 points, or 1.63 per cent, at 11,997.70, the Nasdaq composite index dropping 52.83 points, or 1.99 per cent, t0 2,596.38 and the S&P 500 index stepping back 26.66 points, or 2.11 per cent, at 1,234.35.

"People are very nervous that Europe will yet again fail to adequately address the sovereign debt crisis," says David Kelly, chief market strategist for JP Morgan Funds in New York.

S&P/TSX 3-month chart

Traders had been hoping for a bond-purchase program, but the ECB has been vocal in maintaining it does not want to be seen as the lender of last resort.

"The ECB doesn't want to fall into the trap where they are just always expected to come to the rescue," said Gareth Watson, vice-president investment management and research at Richardson GMP Ltd.

"This is just kind of tough love and unfortunately tough love does not work out so well in the marketplace."

The January crude contract on the New York Mercantile Exchange closed down $2.15 to $98.34 US a barrel and February gold dropped $31.40 to $1,713.40 US an ounce.

European bourses also shed early gains with London's FTSE 100 closing down 1.14 per cent, Frankfurt's DAX declining two per cent and the Paris CAC 40 dropping 2.53 per cent.

With files from The Canadian Press

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Britain leads push against new Europe deal

The European Union's president said Friday that 26 of its 27 member countries are open to joining a new treaty tying their finances together to solve the euro crisis. Only Britain remains opposed, creating a deep rift in the union.

In marathon overnight talks, the 17 countries that use the euro gradually persuaded the others to consider joining the new treaty they would create. Some of those countries may face parliamentary opposition to the treaty, which would allow for unprecedented oversight of national budgets.

"Except for one, all are considering participation," EU President Herman Van Rompuy told reporters.

A document released near the end of a high-stakes EU summit Friday said the leaders of nine of the 10 EU countries that don't use the euro "indicated the possibility to take part in this process after consulting their parliaments where appropriate."

In drafting a new treaty, the countries hope to help European nations struggling with giant debts over the long term, and in that sense there were early indications of success. Such an agreement is considered necessary before the European Central Bank and other institutions commit more money to lowering the borrowing costs of heavily indebted countries like Italy and Spain.

"It's a very good outcome for the euro area, very good," ECB President Mario Draghi said in Brussels. "It is going to be the basis for much more disciplined economic policy for euro-area members. And certainly it is going to be helpful in the present situation."

Stocks and the euro climbed on the news of the new treaty, even though it offers only a long-term solution and no immediate salve for a crisis that started in Greece, then plunged the whole eurozone into crisis and now threatens the global economy.

While the deal could help save the euro, the political implications of the rift could be enormous. Germany and France had hoped to persuade all 27 EU countries to agree to change the treaty that governs their union. But Britain, which doesn't use the euro, firmly said no.

Britain's leaders argued that the revised treaty would threaten their national sovereignty and damage London's esteemed financial services industry. Germany and France, the eurozone's biggest economies, made clear that a deal among the 17 euro countries and whoever else wanted to join was better than nothing.

Hungary, the Czech Republic and Sweden said they would need to consult their parliaments, while the other six countries outside the eurozone — Denmark, Poland, Bulgaria, Romania, Latvia, Lithuania — agreed they wanted to join.

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Flaherty wants Europe to solve its own debt crisis

Finance Minister Jim Flaherty says Europe should use its own resources to resolve its debt crisis before other countries contribute.

His comment during a visit to Beijing adds to the pressure on European leaders to produce a financial rescue plan and resources to support it.

China, South Africa and others have said they might consider contributing but need to first see a detailed plan.

Flaherty said they want to see Europe build a "very strong firewall" to protect their banks and prevent debt contagion from spreading.

Chinese officials have said Beijing might consider putting money into a fund to help stabilize Europe by buying government bonds with money from outside investors but wants to see details before it can decide.

Flaherty said he discussed the issue with Chinese officials in Beijing and at a meeting of Asia-Pacific finance ministers this month, but declined to say what the officials said about China's current position.

"Generally, I think the view is that we first need to see that very substantial commitment and action by the Europeans -- and I'm talking about the members of the euro zone -- before any more would be asked of non-European G-20 countries," said Flaherty.

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