TORONTO (Reuters) - The Canadian dollar edged lower against its U.S. counterpart on Wednesday as the greenback broadly climbed, offsetting data that showed a surprise strengthening of the domestic economy in August.
The U.S. dollar .DXY climbed to its highest level in 16 months against a basket of currencies as investors bought the greenback after Treasury yields moved higher.
The Canadian economy grew by 0.1 percent in August from July on gains in the oil and gas extraction sector, as well as finance and insurance, Statistics Canada said. Analysts had forecast no change.
“If you look through the monthly volatility the economic backdrop still looks strong,” said Nathan Janzen, senior economist at Royal Bank of Canada.
On Tuesday, the Bank of Canada reiterated that more interest rate hikes would be needed to achieve its inflation target and said now was the ideal time to remove monetary stimulus given how well the economy was doing.
Bank of Canada Governor Stephen Poloz will testify to senators this afternoon. The central bank will raise interest rates three times next year, although a firm majority of economists in a snap Reuters poll said it would hold fire at its December meeting.
Still, Canada’s productivity and credit growth face a threat from a flattening yield curve as it makes it less appealing to invest in long-term projects, and lesser still if the Bank of Canada meets its goal of a 3 percent interest rate.
At 9:24 a.m. (1324 GMT), the Canadian dollar CAD=D4 was trading 0.2 percent lower at 1.3134 to the greenback, or 76.14 U.S. cents.
The currency, which on Friday touched 1.3160, its strongest level in more than six weeks, traded in a narrow range of 1.3105 to 1.3139.
The price of oil, one of Canada’s major exports, declined for the third straight day despite the imposition of U.S. sanctions on Iran next week, and stock markets clawed back some of their recent losses.
U.S. crude CLc1 prices were down 0.2 percent at $66.07 a barrel.
Canadian government bond prices were lower across a steeper yield curve in sympathy with U.S. Treasuries. The two-year CA2YT=RR fell 3 Canadian cents to yield 2.33 percent and the 10-year CA10YT=RR declined 23 Canadian cents to yield 2.482 percent.
The 2-year yield touched its highest intraday since Oct. 4 at 2.343 percent.
Canada’s jobs report for September and August trade data are due on Friday.
Reporting by Fergal Smith; Editing by Susan Thomas