December 16, 2015 / 2:31 PM / 3 years ago

C$ weakens on lower oil prices, pares losses after Fed decision

TORONTO (Reuters) - The Canadian dollar weakened to a new 11-1/2-year low against its U.S. counterpart on Wednesday as crude oil prices fell, but the currency recovered somewhat after the U.S. Federal Reserve raised rates for the first time in more than nine years.

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

Oil prices headed back toward 11-year lows, pressured by U.S. government data showing a huge build in crude inventories, while the greenback was stronger against a basket of currencies after the Fed news. [O/R] [USD/]

U.S. crude CLc1 prices settled down 4.9 percent at $35.52 a barrel, while Brent crude LCOc1 lost 3.3 percent to $37.18.

The U.S. dollar rallied initially following “a somewhat more hawkish Fed than the markets had anticipated,” according to Derek Holt, vice president of economics at Scotiabank.

At 2:59 p.m. EST (1959 GMT), the Canadian dollar CAD=D4 was trading at C$1.3765 to the greenback, or 72.65 U.S. cents, weaker than Tuesday’s close of C$1.3738, or 72.79 U.S. cents.

The currency’s strongest level of the session was C$1.3729, while its weakest level was C$1.3848, a fresh 11-1/2-year low.

Its initial reaction on the Fed announcement was to weaken, but it pared losses after failing to breach the session low.

The Fed made clear the rate hike was a tentative beginning to a “gradual” tightening cycle, and that in deciding its next move it would put a premium on monitoring inflation, which remains mired below target.

On Tuesday, weak manufacturing data weighed on the domestic outlook, and Bank of Canada Governor Stephen Poloz signaled clearly that markets should not expect him to match Fed rate hikes.

Canadian government bond prices were mixed across the maturity curve, with the two-year CA2YT=RR price down 4 Canadian cents to yield 0.538 percent and the benchmark 10-year CA10YT=RR rising 12 Canadian cents to yield 1.476 percent.

The curve flattened in sympathy with U.S. Treasuries, as the spread between the 2-year and 10-year yields narrowed by 3.2 basis points to 93.8 basis points, indicating outperformance for longer-dated maturities.

Foreign investors bought a net C$22.08 billion of Canadian securities in October, mostly in bonds. The net total is up from C$3.35 billion in September, Statistics Canada said.

Canadian Prime Minister Justin Trudeau told reporters that “having the United States economy pick up steam is ultimately going to be good for Canada”.

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

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