Canadian dollars are pictured in Vancouver, Sept. 22, 2011. THE CANADIAN PRESS/Jonathan Hayward

TORONTO - The Canadian dollar drifted lower Tuesday as the loonie continued to suffer from risk aversion connected to worry about the currencies of emerging markets.

The loonie was down 0.25 of a cent to 89.74 cents US after closing Monday at its lowest level since mid-July 2009.

Markets have been severely buffetted over the last few sessions on concerns about emerging markets, including slowing growth in China, the world’s second biggest economy.

But markets were reassured after a high-profile Chinese financial company, China Credit Trust, cut a last minute deal to avoid a default. The deal avoided the first of what was feared would be a cascade of defaults in the country’s shadow banking sector.

Markets have also been jittery because of currency turmoil involving countries such as the Turkish lira, the Russian ruble and the Indian rupee as investors wonder how they'll be affected by the Federal Reserve's policy to reduce its monetary stimulus.

The Fed’s massive bond purchases over the last few years has resulted in a stream of cheap money into those markets. But now the central bank is cutting back on those asset purchases.

The Fed makes its next interest rate announcement Wednesday and markets widely expect it to further pare its bond purchases by another US$10 billion a month to $65 billion.

The Canadian dollar has had a tough month, losing more than four cents, partly because of Fed tapering which has boosted the U.S. dollar against other currencies.

But the loonie has also suffered from a worsening trade picture, weak December job growth and a dovish stance by the Bank of Canada on interest rates.

The downward pressure on the currency is expected to continue for awhile yet, which is not a bad thing for the country's export sector.

"Near-term pressure is likely to continue as sentiment favours a weak Canadian dollar and the Bank of Canada is perceived as increasingly dovish," observed Camilla Sutton, Chief FX Strategist, Managing Director, Scotiabank Global Banking and Markets.

"However in the second half of the year, a weak dollars combined with a U.S. recovery is a powerful combination for Canada's export sector and the Canadian dollar."

On the commodity markets, oil prices started to recover after two days of steep losses with the March crude contract on the New York Mercantile Exchange up 51 cents to US$96.23 a barrel.

March copper on the Nymex gained a cent to US$3.27 a pound while February bullion declined $8.90 to US$1,254.50 an ounce.

News from © The Canadian Press, 2014