TORONTO (Reuters) - Canada's dollar slumped against its U.S. counterpart on Tuesday as investor optimism about the euro zone faded and investors focused on the possibility a German court could delay Europe's new bailout fund.
The market was also concerned about signs of a sharp slowdown in China and its potential impact on the global economy.
China, the world's second-largest economy, curtailed imports in June in further evidence that Europe's three-year-long debt crisis is dragging down economic activity around the world.
For June, China's crude oil imports plunged to their lowest levels of the year from a record high in May. The data helped to push oil prices sharply lower. <O/R>
"Today just seems like everything is sort of a downer day. We've got oil off now two bucks, equities all down across the board," said Don Mikolich, an executive director of foreign exchange sales at CIBC World Markets.
The euro slumped to a new two-year trough against the dollar after a meeting of euro zone finance ministers failed to ease concerns about the region's crisis.
Euro zone ministers struggled to reassure financial markets that an aid package for Spain they outlined overnight will help stabilize the currency bloc - a task made all the harder by a German legal challenge to its crisis-fighting tools. <FRX/>
Market sentiment was soured by the German Constitutional Court, which began a hearing into whether the euro zone's fund, known as the European Stability Mechanism, and planned changes to the region's budget rules are compatible with German law. Approval would pave the way for funds to be used more flexibly to ease the European debt crisis. <GVD/EUR>
The Canadian currency ended at C$1.0226 against the greenback, or 97.79 U.S. cents, slightly softer than Monday's North American session close at C$1.0193 to the U.S. dollar, or 98.11 U.S. cents.
Mikolich said he saw the currency trading in a range of C$1.0150 to C$1.0250 against the greenback.
"I think we'd have to have a break above C$1.0250 to change the mindset back to a weaker Canadian dollar whereas where we sit here now people still think Canada's got some room to gain."
One bright spot was domestic housing data. Canadian housing starts climbed unexpectedly in June as multiple urban starts in Quebec and British Columbia bounced higher, but homebuilding is still expected to slow as the year progresses, Canada Mortgage and Housing Corp said on Tuesday.
Canadian bond prices were mixed across the curve. The two-year government bond was lower by 3 Canadian cents to yield 0.973 percent, while the benchmark 10-year bond added 4 Canadian cents to yield 1.658 percent.
(Additional reporting by Claire Sibonney; Editing by James Dalgleish)