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TORONTO (Reuters) - The Canadian dollar strengthened to a fresh seven-week high against its U.S. counterpart on Monday as oil surged and investors weighed what message will accompany an expected interest rate hike this week from the Federal Reserve.
The loonie has rebounded more than three percent from an eight-month low of C$1.3589 in mid-November. A more uncertain trade environment for Canada since the U.S. election and raised investor expectations for Fed rate increases have been offset by higher prices for oil, one of Canada's major exports.
"It's all about oil prices," said Shaun Osborne, chief currency strategist at Scotiabank.
U.S. crude oil futures CLc1 settled $1.33 higher at $52.83 a barrel after the Organization of the Petroleum Exporting Countries and some of its rivals reached their first deal since 2001 to jointly reduce output to tackle global oversupply.
The U.S. dollar .DXY fell against a basket of major currencies on concerns that the Fed could suggest that the greenback's recent gains had gone too far.
"The risk for the U.S. dollar is that oil prices continue to push on and perhaps we get a dovish hike message from the Fed ... as they hike rates now and move to the sidelines until they get some clarity on what kind of policies we are going to get from the (Donald Trump) administration," Osborne said.
The Canadian dollar CAD=D4 ended at C$1.3134 to the greenback, or 76.14 U.S. cents, stronger than Friday's close of C$1.3180, or 75.87 U.S. cents.
The currency's weakest level of the session was C$1.3168, while it touched its strongest since Oct. 19 at C$1.3110.
Recent gains for the loonie have come despite the Bank of Canada pointing last week to "significant" slack in the Canadian economy as it held interest rates steady.
The central bank's decision to leave rates unchanged set the stage for a divergence in policy from that of the Fed.
Strategists expect yields on Canada's bonds to fall further below those of their U.S. counterparts, softening the blow of expected Fed rate increases on already stretched Canadian households.
Canadian government bond prices were lower across the yield curve in sympathy with U.S. Treasuries as higher oil prices supported investors' expectations for increased inflation.
The two-year CA2YT=RR price fell 3.5 Canadian cents to yield 0.760 percent and the benchmark 10-year CA10YT=RR declined 21 Canadian cents to yield 1.752 percent.
The 10-year yield touched its highest intraday level since July 2015 at 1.781 percent.
Reporting by Fergal Smith; Editing by Meredith Mazzilli and Grant McCool