Canadian dollar firms against weaker greenback as domestic economy expands

TORONTO (Reuters) - The Canadian dollar strengthened against its U.S. counterpart on Tuesday as domestic data showed the economy expanded for a third straight month and the federal government raised infrastructure spending, while political uncertainty pressured the greenback.

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 U.S. dollar .DXY weakened against a basket of major currencies on U.S. political uncertainty, while the Mexican peso MXN= hit a more than three-week low on positioning for a potential victory for Republican presidential candidate Donald Trump. [nL1N1D20XD]

“It is a flight out of North America,” said Shaun Osborne, chief currency strategist at Scotiabank, adding that the euro, Swiss franc and Japanese yen were some of the major currencies that benefited.

Canada’s economy grew 0.2 percent in August from July, as expected, on strength in mining, quarrying and oil and gas extraction. [nL1N1D11Y7]

“It’s a bit weaker than the headline would suggest,” but the Bank of Canada will take the data with “cautious optimism,” said Derek Holt, vice president and head of capital markets economics at Scotiabank.

Canada will ramp up its spending on infrastructure projects by an extra C$81 billion over the next 12 years in a bid to revitalize an economy struggling with sub-par growth, Finance Minister Bill Morneau said. [nL1N1D21S4]

Firmer investment trends from the federal government improve the platform for growth but we are going to need the private sector kicking into gear as well, said Nick Exarhos, economist at CIBC Capital Markets.

The Canadian dollar CAD=D4 ended at C$1.3393 to the greenback, or 74.67 U.S. cents, slightly stronger than Monday's close of C$1.3411, or 74.57 U.S. cents.

The currency’s strongest level of the session was C$1.3353, while its weakest was C$1.3427.

It fell 2.2 percent in October and touched its weakest level in seven months at C$1.3434 on Friday.

Still, the Canadian dollar will strengthen over the coming year as higher oil prices offset higher interest rates from the U.S. Federal Reserve and a more dovish stance from the Bank of Canada, a Reuters poll found. [CAD/POLL]

U.S. crude oil futures CLc1 settled 19 cents lower at $46.67 a barrel ahead of data likely to show a U.S. crude inventory build and on renewed doubts about whether OPEC will follow through with proposed output cuts. [O/R]

Oil is one of Canada’s major exports.

Canadian government bond prices were mixed across the yield curve, with the two-year CA2YT=RR price flat to yield 0.553 percent and the benchmark 10-year CA10YT=RR falling 11 Canadian cents to yield 1.208 percent.

Reporting by Fergal Smith; Editing by Paul Simao and James Dalgleish