(Adds analyst quotes and details on Bank of Canada rate
decision, updates prices)
* Canadian dollar at C$1.3236, or 75.55 U.S. cents
* Loonie touches its strongest since Oct. 21 at C$1.3234
* Bond prices higher across the yield curve
By Fergal Smith
TORONTO, Dec 7 (Reuters) - The Canadian dollar strengthened
to a near seven-week high against its U.S. counterpart on
Wednesday as investor reaction to the Bank of Canada's interest
rate decision offset lower oil prices.
The central bank pointed to undiminished uncertainty and a
"significant amount" of slack in the Canadian economy as it held
interest rates steady, noting that inflation is below
expectations and growth set to slow as 2016 draws to a close.
Still, with the policy rate at 0.50 percent, the Bank of
Canada may be running out of room to cut interest rates.
"The threat to cut interest rates is not really
deliverable," said Richard Gilhooly, head of rates strategy at
CIBC Capital Markets, who doubts the central bank's willingness
to take rates into negative territory.
The implied probability of a rate cut by April was nearly 10
percent, overnight index swaps data showed, little changed from
before the rate decision.
"The rapid rise in global yields has occurred really for the
wrong reasons for Canada," Gilhooly said, noting that the
central bank removed its reference to accommodative financial
conditions.
At 11:30 a.m. EST (1630 GMT), the Canadian dollar
was trading at C$1.3236 to the greenback, or 75.55 U.S. cents,
stronger than Tuesday's close of C$1.3284, or 75.28 U.S. cents.
The currency's weakest level of the session was C$1.3299,
while it touched its strongest since Oct. 21 at C$1.3234.
U.S. crude prices were down 1.16 percent at $50.34 a
barrel on doubts production cuts would be deep enough to end a
supply overhang that has weighed on markets for more than two
years.
Canadian government bond prices were higher across the yield
curve in sympathy with U.S. Treasuries and German government
bonds amid expectations the European Central Bank will extend
its bond-buying stimulus scheme this week.
The two-year rose 4.5 Canadian cents to yield 0.7
percent and the benchmark 10-year climbed 27
Canadian cents to yield 1.603 percent.
The 2-year yield fell 1 basis point further below its U.S.
equivalent to a spread of -40.8 basis points.
The Bank of Canada will want that spread to widen further
"to compensate for stronger oil prices and so keep the Canadian
dollar weak," Gilhooly said.
(Reporting by Fergal Smith; Editing by Bill Trott and Meredith
Mazzilli)