TORONTO (Reuters) - The Canadian dollar firmed against the greenback for a third day on Wednesday but gains were limited by investor caution ahead of a policy statement by the U.S. Federal Reserve later in the day.
Market speculation has been rife over whether the U.S. central bank will change its language on how long it will hold interest rates at ultra-low levels.
Expectations that the statement will be a bit more hawkish sparked a nearly 2 percent selloff in the loonie last week, but the market was more cautious on Wednesday.
The Fed will issue its statement at 2 p.m. EDT, at the conclusion of a two-day policy-setting meeting, along with new economic and rate projections. A press conference by Fed Chair Janet Yellen will follow at 2:30 p.m.
In previous statements, the Fed has said it will keep rates low for a "considerable time" after its bond-buying program ends. That is likely to happen in October.
"There are a lot of different elements to digest," said Greg Moore, senior currency strategist at Royal Bank of Canada in Toronto. "It seems that there's been quite a lot of focus on how the forward guidance will be adjusted, particularly whether they'll maintain that 'considerable time' phrase or not."
"That essentially leaves us completely at the whim of what is going on with the U.S. dollar."
The Canadian dollar was at C$1.0961 to the greenback, or 91.23 U.S. cents, stronger than Tuesday's close of C$1.0970, or 91.16 U.S. cents.
The loonie has seen some volatile trading in recent sessions. It broke through key technical resistance at C$1.10 last week, only to break back below that level on Tuesday.
With a number of potentially market-moving events still to come, including Scotland's referendum on independence from the United Kingdom and Canadian inflation data, the currency will likely remain choppy through the rest of the week, Moore said.
Still, the longer-term forecast is for the loonie to weaken, likely hitting C$1.15 by the end of the year, Moore said.
"We do expect the stronger U.S. dollar-Canadian dollar trend to reassert itself a little bit more clearly in the fourth quarter, as some of the bigger driving themes start to unfold," particularly the divergence between the Fed and Bank of Canada, he said.
Canadian government bond prices were higher across the maturity curve, with the two-year up half a Canadian cent to yield 1.146 percent and the benchmark 10-year up 11 Canadian cents to yield 2.230 percent.
Editing by Peter Galloway