Canadian dollar firms as economic data weighs on greenback

TORONTO (Reuters) - The Canadian dollar strengthened against its U.S. counterpart on Monday as economic data weighed on the greenback, while Canada’s finance minister expressed optimism that deficit spending will spur domestic economic growth.

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 Canadian dollar CAD=D4 settled at C$1.3181 to the greenback, or 75.87 U.S. cents, stronger than Friday's close of C$1.3240, or 75.53 U.S. cents.

The U.S. dollar .DXY hit its lowest level against a basket of six major currencies since last Wednesday after a deep downward revision to U.S. consumer spending for January.

“The revision to consumer spending numbers in January gives the market a bit of concern in terms of future rate hikes from the Federal Reserve,” said Scott Smith, a senior market analyst at Cambridge Global Payments.

In addition, U.S. consumer spending rose only slightly in February and inflation retreated, suggesting the Fed could remain cautious about raising interest rates this year.

Meanwhile, Canada’s Liberal government believes the federal budget will be balanced in “about” five years due to higher growth spurred by deficit spending, Finance Minister Bill Morneau said on Sunday.

The government gave no target date for eliminating the deficit when it unveiled the budget last week.

The stimulus budget, combined with a modest recovery in oil and non-commodity exports, makes it likely the Bank of Canada’s next move will be an interest rate hike rather than a cut.

“The market right now is too pessimistic about interest rate increases in the U.S. and too optimistic about interest rate decreases in Canada,” said Cambridge’s Smith.

He expects to see the Canadian dollar weaken further, perhaps hitting C$1.40 in the coming months, before recovering somewhat as domestic economic data improves, he said.

The currency’s weakest level on Monday was C$1.3286, while it touched its strongest since March 23 at C$1.3167.

Oil prices edged lower in thin Easter holiday trading. U.S. crude CLc1 prices settled down 0.2 percent at $39.39 a barrel. [O/R]

Canadian government bond prices rose across the maturity curve, with the two-year CA2YT=RR price up 1 Canadian cent to yield 0.561 percent and the benchmark 10-year CA10YT=RR adding 10 Canadian cents to yield 1.261 percent.

January gross domestic product data is awaited on Thursday. Analysts expect 0.3 percent growth for the month, which would reinforce expectations that first-quarter growth will exceed the Bank of Canada's forecast of 1 percent. ECONCA

Additional reporting by Fergal Smith; editing by G Crosse, Nick Zieminski