Canadian dollar weakens against firmer greenback as oil falls

TORONTO (Reuters) - The commodity-linked Canadian dollar weakened against a firmer U.S. counterpart on Wednesday as oil fell, although losses for the currency were restrained as investors awaited clues this week on the U.S. interest rate outlook.

A Canadian dollar coin, commonly known as the "Loonie", is pictured in this illustration picture taken in Toronto January 23, 2015. The Canadian dollar strengthened against the U.S. dollar on Friday after Canadian CPI data showed an increase in core inflation. REUTERS/Mark Blinch

Oil fell on an unexpected increase in U.S. crude stockpiles that revived worries about the supply glut that has capped prices for the past two years. U.S. crude CLc1 prices were down 1.54 percent to $47.36 a barrel.

The U.S. dollar .DXY rose against a basket of major currencies ahead of a gathering of global central bankers later this week in Jackson Hole, Wyoming, where the focus will be on Friday's keynote speech by Federal Reserve Chair Janet Yellen.

At 9:07 a.m. EDT (1307 GMT), the Canadian dollar CAD=D4 was trading at C$1.2942 to the greenback, or 77.27 U.S. cents, weaker than Tuesday's close of C$1.2910, or 77.46 U.S. cents.

The currency’s strongest level of the session was C$1.2902, while its weakest was C$1.2953.

On Monday, the loonie touched its weakest in one week at C$1.2965.

The Alberta government raised its 2016-17 budget deficit forecast to C$10.9 billion on Tuesday, largely because of a massive wildfire that ripped through the province’s oil sands hub of Fort McMurray in May.

The wildfire is expected to weigh on Canada’s second-quarter growth. The Bank of Canada projected in July that the economy will contract 1 percent annualized before rebounding 3.5 percent in the third quarter.

Canadian government bond prices were mixed across the maturity curve, with the two-year CA2YT=RR bond down 0.5 Canadian cent to yield 0.560 percent and the benchmark 10-year CA10YT=RR rising 3 Canadian cents to yield 1.020 percent.

The curve flattened as the spread between the 2-year and 10-year yields narrowed by 0.6 of a basis point to 46 basis points, its narrowest since June 2008, indicating outperformance for longer-dated maturities.

Reporting by Fergal Smith; Editing by Nick Zieminski