C$ pares losses against greenback as oil rises

TORONTO (Reuters) - Higher oil prices helped the Canadian dollar reduce its losses against its broadly firmer U.S. counterpart after the currency weakened to a seven-week low on Tuesday.

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 loonie has fallen 5 percent from its 10-month high of C$1.2461 on May 3, pressured by speculation that the U.S. Federal Reserve will raise interest rates as early as next month, as well as a weaker outlook for Canada’s economy following a strong start to 2016.

The economy may contract by an annualized rate of 1 percent or more in the second quarter, according to a research note on Tuesday from BMO Capital Markets, well below the Bank of Canada’s forecast for a 1 percent expansion.

The central bank is widely expected to hold interest rates at 0.50 percent on Wednesday but strike a more dovish tone. Analysts will parse its statement for indications of the economic impact of the massive wildfire in Alberta. [CA/POLL]

Authorities in Canada lifted evacuation orders on Monday for all work camps and some additional oil facilities that had been shuttered when the blaze threatened the nation’s energy hub, a significant step for companies eager to restart production.

At 9:24 a.m. EDT (1324 GMT), the Canadian dollar CAD=D4 was trading at C$1.3148 to the greenback, or 76.06 U.S. cents, slightly weaker than Monday's close of C$1.3143, or 76.09 U.S. cents. It touched its weakest since April 5 at C$1.3188.

The loonie’s official close on Friday before the Victoria Day holiday on Monday was C$1.3124, or 76.20 U.S. cents.

Oil reversed early losses, turning slightly positive as investors awaited inventory data from the United States that was expected to show a shrinking supply overhang. U.S. crude CLc1 prices were up 0.15 percent at $48.15 a barrel. [O/R]

The U.S. dollar strengthened across the board and hit an eight-week high against the euro as investors brought forward their bets on when the Fed will raise interest rates again.

Canadian government bond prices were mixed across the maturity curve, with the two-year CA2YT=RR up 1 Canadian cent to yield 0.62 percent and the benchmark 10-year CA10YT=RR falling 1 Canadian cent to yield 1.35 percent.

The Canada-U.S. two-year bond spread was 2.6 basis points more negative at -30.2 basis points, its largest gap since March 28, as Canadian government bonds outperformed at the front and in the belly of the curve.

Reporting by Fergal Smith; Editing by Lisa Von Ahn