February 1, 2017 / 10:02 PM / 6 months ago

Canadian dollar weakens but pares losses after Fed decision

3 Min Read

A Canadian dollar coin, commonly known as the "Loonie", is pictured in this illustration picture taken in Toronto January 23, 2015.Mark Blinch

TORONTO (Reuters) - The Canadian dollar weakened against its U.S. counterpart on Wednesday but losses were pared as a broader recovery for the greenback lost some momentum after the Federal Reserve interest rate decision.

The Fed said job gains remained solid, inflation had increased and economic confidence was rising, although it gave no firm signal on the timing of its next rate move.

"We had an FOMC statement that really wasn't as hawkish as many were hoping for ... whatever was priced in for a potential March hike has been unwound," said Bipan Rai, senior macro strategist at CIBC Capital Markets.

Some gains for the U.S. dollar index .DXY against a basket of major currencies were clawed back on the interest rate decision. It follows the worst start to the year in three decades for the greenback on concerns that the United States was poised to ditch its two-decade-old "strong dollar" policy.

The Canadian dollar CAD=D4 ended at C$1.3047 to the greenback, or 76.65 U.S. cents, weaker than Tuesday's official close of C$1.3012, or 76.85 U.S. cents.

The currency traded in a range of C$1.3032 to C$1.3102.

Losses for the loonie came even as prices of oil, one of Canada's major exports, rose. U.S. crude CLc1 settled $1.07 higher at $53.88 a barrel as investors weighed signs that Russia and the Organization of the Petroleum Exporting Countries producers are delivering on promised supply reductions. [O/R]

Bank of Canada Governor Stephen Poloz reiterated on Tuesday that the firmer Canadian dollar was a headwind for the export sector.

The loonie rose 3.2 percent in January after climbing 3.1 percent in 2016. On Tuesday, it touched its strongest level since Sept. 9 at C$1.2969.

Recent domestic data and improving sentiment for manufacturers globally have helped support Canada's commodity-linked currency, Rai said.

The Canadian manufacturing sector grew at its fastest pace in over two years in January, while some other countries registered multi-year highs in output.

Some losses for Canadian government bonds were pared in sympathy with U.S. Treasuries after the Fed stopped short of a very hawkish tone.

The two-year CA2YT=RR price fell 1 Canadian cent to yield 0.776 percent and the 10-year CA10YT=RR price declined 8 Canadian cents to yield 1.766 percent.

Reporting by Fergal Smith; Editing by Lisa Von Ahn and Lisa Shumaker

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