C$ gains after touching weakest in nearly four months

TORONTO (Reuters) - The Canadian dollar gained against the U.S. dollar on Tuesday after touching its lowest level in nearly four months, as currency markets braced for a policy update from the U.S. Federal Reserve.

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

The Canadian dollar CAD=D4 ended at C$1.3189 to the greenback, or 75.82 U.S. cents, stronger than the Bank of Canada's official Monday close of C$1.3220, or 75.64 U.S. cents.

The currency’s weakest intra-day level was C$1.3244, its lowest level since late March.

“People are getting back more to a neutral stance as we approach the central bank meetings this week,” said Darcy Browne, managing director for foreign exchange sales at CIBC Capital Markets.

The Fed is expected to leave interest rates unchanged when it concludes its two-day meeting on Wednesday, with investors looking for any signs that the U.S. central bank might be more likely to hike rates in coming months.

The Bank of Japan is also meeting this week, and most economists surveyed by Reuters expect the BoJ to expand its asset purchases and cut rates further below zero. Its two-day meeting ends on Friday.

Canada’s domestic economic calendar is light this week. Data at the end of the week is expected to show that economic growth pulled back in May, likely due to the disruption caused by wildfires in Alberta.

The loonie has lost more than 2 percent so far in July, hurt as the price of oil has fallen back toward $40 a barrel after hitting $50 in June.

U.S. crude prices fell on Tuesday, hitting three-month lows, as worries over a gasoline glut outweighed expectations of U.S. crude stock declines, while Brent erased early losses to settle higher.

Canadian government bond prices fell across the maturity curve. The two-year CA2YT=RR price was down 3.5 Canadian cents to yield 0.595 percent while the benchmark 10-year CA10YT=RR fell 16 Canadian cents to yield 1.123 percent.

The Canada-U.S. two-year bond spread narrowed to -16.3 basis points, while the 10-year spread came in to -44.2 basis points.

Additional reporting by Leah Schnurr in Ottawa; Editing by Jonathan Oatis and Leslie Adler