CBC News Posted: Jun 16, 2011 11:38 AM ET

The Canadian dollar fell to a three-month low Thursday as worries that Greece will default on its massive debts sent traders to the safe haven status of the U.S. dollar for a second day.

The loonie was down 0.54 of a cent to 101.61 cents US at mid-afternoon. It fell more than one cent on Wednesday.

"I think the risk is we could easily move toward parity because we're seeing a trend to risk aversion in markets and a lot of uncertainty stemming out of Europe," said Camilla Sutton, chief currency strategist at Scotia Capital.

"As well, we're also seeing a softening in U.S. economic data overall. All of that puts some pressure on the Canadian economic outlook as well."

Canada's dollar hasn't closed below parity since the end of January.

Canada's benchmark stock index, the S&P/TSX Composite Index, was also lower. The TSX shed 105 points to sit at 12866 in the afternoon. That's almost 10 per cent below its recent high of 14,270, hit on April 5. When a stock index loses more than 10 per cent, it's considered to be an official "correction."

Anti-auterity protesters gesture outside the Greek parliament in Athens on Wednesday. Concern about a financial collapse in Greece has led currency traders to seek safety in the U.S. dollar. (Lefteris Pitarakis/Associated Press)

The political crisis in Greece escalated Thursday, with critics within the governing Socialist Party openly in revolt over harsh austerity measures, despite assurances from the European Union that Athens would receive rescue loan money needed to avoid a summer default.

Markets fear that a Greek financial collapse could trigger panic elsewhere in the 17-nation euro zone, pushing up borrowing costs in other vulnerable EU countries and pressuring financial markets.

'Markets are jittery because [of] the risk of contagion spreading to other euro-zone countries and banks is a key concern.'—Rahim Madhavji, Knightsbridge Foreign Exchange

Greek Prime Minister George Papandreou was forced to delay a planned cabinet reshuffle and convene an emergency party meeting Thursday after two Socialist deputies resigned and others openly questioned his leadership.

Investors are deeply worried that a default in Greece could hurt banks elsewhere and set off a catastrophic financial chain reaction.

"Markets are jittery because [of] the risk of contagion spreading to other euro-zone countries and banks is a key concern," said Rahim Madhavji of Knightsbridge Foreign Exchange.

"If the value of debt holdings is re-priced/restructured, on a leveraged basis, many banks will require additional capital, and quickly, tightening lending, and a call for capital all at the same time."

The dollar has also suffered following the release of economic data which indicates the U.S. economy is slowing down faster than thought.

Bad news from Canada's biggest trading partner this week included two regional manufacturing surveys — the Empire State and Philadelphia Fed indexes — came in well below expectations.

"What transpires for the U.S. economy is by default also transpiring in Canada, so that's a big negative," added Sutton.