Canadian dollar hits 12-day low, pressured by divergent rate outlook

TORONTO (Reuters) - The Canadian dollar weakened on Tuesday to hit a 12-day low against its U.S. counterpart, whose gains against a basket of major currencies offset higher prices for oil, a major export for Canada.

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 greenback .DXY climbed after hawkish comments from Federal Reserve officials pointed to a potential U.S. interest rate increase next month.

“Our view is that the Canadian dollar would likely weaken over the medium term and that’s really based on this outlook for higher U.S. interest rates,” said Eric Viloria, currency strategist at Wells Fargo.

He says the interest-rate differential between Canada and the United States has become a more important driver for the direction of the Canadian dollar than crude oil.

U.S. crude CLc1 prices settled 66 cents higher at $54.06 a barrel after the Organization of the Petroleum Exporting Countries said it was sticking to its agreement to cut production and hoped compliance with the deal would be even higher. [O/R]

The Canadian dollar CAD=D4 ended at C$1.3138 to the greenback, or 76.12 U.S. cents, weaker than Monday's close of C$1.3101, or 76.33 U.S. cents, according to Reuters data.

The currency’s strongest level of the session was C$1.3100, while it touched its weakest level since Feb. 9 at C$1.3165.

Monday was a market holiday in Canada. The Bank of Canada’s official close on Friday was C$1.3099, or 76.34 U.S. cents.

More than 100 French left-wing lawmakers decided on Tuesday to appeal to the country’s Constitutional Council to block a contentious free trade deal between the European Union and Canada.

The passage last week of the Comprehensive Economic and Trade Agreement could reduce Canada’s reliance on the North American Free Trade Agreement, under which the country sends 75 percent of its exports to the United States.

Any talks to renew NAFTA would involve all three member nations, a top Canadian official said, dampening speculation the United States might seek to sit down with Canada first and then Mexico.

Canadian government bond prices were lower across the yield curve in sympathy with U.S. Treasuries as improved risk appetite reduced demand for safe-haven assets.

The two-year CA2YT=RR dipped 1.5 Canadian cents to yield 0.786 percent, and the 10-year CA10YT=RR declined 7 Canadian cents to yield 1.719 percent.

Domestic retail sales data for December is due on Wednesday. Economists expect it to be unchanged but to show a rise of 0.6 percent after excluding autos.

Reporting by Fergal Smith; Editing by Lisa Von Ahn and Leslie Adler