(Adds details on activity and updates prices) * Loonie rises 0.2 percent against the U.S. dollar * Price of U.S. oil climbs 1.4 percent * Canada's 10-year yield hits 21-month low at 1.667 percent By Fergal Smith TORONTO, March 20 (Reuters) - The Canadian dollar strengthened against its U.S. counterpart on Wednesday as oil prices rose and the greenback was pressured by a more dovish-than-expected interest rate announcement from the Federal Reserve. The Fed brought its three-year drive to tighten monetary policy to an abrupt end, abandoning projections for any interest rate hikes this year amid signs of an economic slowdown, and saying it would halt the steady decline of its balance sheet in September. The U.S. dollar hit its lowest level in more than six weeks against a basket of major currencies. The price of oil, one of Canada's major exports, was boosted by U.S. government data that showed tightening domestic oil supplies. U.S. crude oil futures settled 1.4 percent higher at $59.83 a barrel. At 5 p.m. (2100 GMT), the Canadian dollar was trading 0.2 percent higher at 1.3304 to the greenback, or 75.17 U.S. cents. The currency traded in a range of 1.3258 to 1.3347. The modest gain for the loonie came one day after Canadian Prime Minister Justin Trudeau's government lavished new spending on middle-class voters in its budget on Tuesday as it forecast a bigger fiscal deficit of C$19.8 billion in 2019-20. The budget contained spending measures that could lift gross domestic product by 0.2 percent this year, which is "not enough to move the dial on Bank of Canada policy," Sal Guatieri, a senior economist at BMO Capital Markets, said in a note. The market has shifted from expecting further rate hikes from the Bank of Canada, which has tightened by 125 basis points since July 2017, to seeing potential for a rate cut as data showed a slowdown in the country's economy. Canada said on Tuesday it would issue nearly 20 percent more bonds in the coming fiscal year to help the Liberal government fund its spending programs. Canadian government bond prices were higher across the yield curve on Wednesday in sympathy with U.S. Treasuries. The two-year rose 8.5 Canadian cents to yield 1.602 percent and the 10-year climbed 53 Canadian cents to yield 1.667 percent, its lowest since June 2017. Canada's inflation report for February and January retail sales data are due on Friday. (Reporting by Fergal Smith; Editing by Peter Cooney)
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