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TORONTO (Reuters) - The Canadian dollar slid against the U.S. currency on Wednesday after a four-day rally that took it to its strongest level in more than a year, with traders looking ahead to the Federal Reserve's policy announcement on Thursday.
Markets are anticipating the U.S. central bank to announce a third round of bond purchases - know as quantitative easing - in an effort to revitalize a sluggish economy that has dragged on the country's employment growth.
"A little bit of profit-taking across the markets. I think the markets as a whole still expect QE3 from the Fed tomorrow and that's really how they're positioned right now," said Shane Enright, executive director, foreign exchange sales at CIBC World Markets.
"If we get it, I imagine there will still be some volatility, probably broader consolidation. If we don't see it, there should be U.S. (dollar) strength across the board."
Stimulus action by the Fed is expected to weigh on the U.S. dollar against currencies such as the Canadian dollar.
The currency finished its North American session at C$0.9766 versus the greenback, or $1.0240, weaker than Tuesday's close at C$0.9732 to the U.S. dollar, or $1.0275.
The Canadian unit was underperforming against major currencies, including the euro, which touched a fourth-month high against the U.S. dollar after the German Constitutional Court said the country could ratify the euro zone's new bailout fund and budget pact.
Canada's dollar hit a 13-month high on Tuesday, propelled by a confluence of factors, including Fed stimulus expectations, a hawkish Bank of Canada stance, strong domestic job figures and a bond buyback plan announced by the European Central Bank.
"Canada is stretched a little here. We're really the only currency trading at its 13-month highs, and so I think the others are playing catch-up maybe, and Canada is just waiting for the next catalyst," said Camilla Sutton, chief currency strategist at Scotiabank.
"We're totally happy to ignore yesterday's absolutely miserable trade balance data and now waiting for FOMC tomorrow," she added.
Dismal data from the government on Tuesday showed that the country's trade deficit hit a record high in July, but it was largely ignored.
Canadian government bond prices retreated across the curve, with the two-year bond down 3 Canadian cents to yield 1.191 percent and the benchmark 10-year bond falling 44 Canadian cents, yielding 1.902 percent.
Additional reporting by Claire Sibonney; Editing by Jeffrey Hodgson