Canadian dollar hits nearly three-month high as greenback slides

TORONTO (Reuters) - The Canadian dollar strengthened to a nearly three-month high against its U.S. counterpart on Tuesday, one day before a Bank of Canada interest rate decision and updated outlook, as a New Year selloff of the greenback deepened.

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 fell along with stocks and bond yields after U.S. President-elect Donald Trump said the strong greenback was hurting the nation's competitiveness.

“This is just noise in the context of an upswing,” said Rahim Madhavji, president of in reference to currency moves related to Trump’s comments.

“We still think the U.S. dollar will bounce back” over the next three months as the U.S. economy improves and investors bet on more rate hikes from the Federal Reserve, he said. “I don’t think the Canadian economy will move in the same way or with the some speed.”

Analysts expect the Bank of Canada to announce on Wednesday that it would leave its policy rate on hold at 0.5 percent, while nearly half of economists polled recently pared back their Canadian growth forecasts, with the possibility that Trump will follow through on protectionist rhetoric clouding the outlook.

Recent domestic data has shown a surge in jobs in December and the first trade surplus in more than two years in November, while a Bank of Canada survey last week pointed to improving business conditions.

U.S. crude CLc1 prices settled marginally higher, as the weaker greenback offset forecasts that U.S. and Russian producers would boost output later this year. [O/R]

The Canadian dollar CAD=D4 settled at C$1.3058 to the greenback, or 76.58 U.S. cents, much stronger than Monday's close of C$1.3187, or 75.83 U.S. cents.

The currency’s weakest level of the session was C$1.3190, while it touched its strongest since Oct. 19 at C$1.3019.

Canadian government bond prices were higher across the yield curve in sympathy with U.S. Treasuries. The two-year CA2YT=RR rose 3.5 Canadian cents to yield 0.775 percent, and the 10-year CA10YT=RR climbed 25 Canadian cents to yield 1.666 percent.

Lending to small businesses in Canada picked up in November on gains in the manufacturing and retail sectors, a report showed, suggesting companies felt more confident with the U.S. election out of the way.

The PayNet Canadian Small Business Lending Index rose to 119.9 from 116.5 in October, while lending to medium-sized companies increased to 218.3 from 211.3.

Additional reporting by Fergal Smith; Editing by Lisa Von Ahn and James Dalgleish