C$ weakens with oil as investors await Fed Chair Yellen

TORONTO (Reuters) - The Canadian dollar weakened against its broadly firmer U.S. counterpart on Friday as oil fell and investors braced for possible clues on the timing of U.S. interest rate hikes from Federal Reserve Chair Janet Yellen.

A Canadian dollar coin, commonly known as the "Loonie", is pictured in this illustration picture taken in Toronto January 23, 2015. REUTERS/Mark Blinch

Oil futures dropped below $49, moving further from a seven-month high hit a day earlier, with analysts predicting range-bound markets for the next few months as supply outages slowly help to clear a glut of crude. [O/R]

The U.S. dollar .DXY strengthened against a basket of major currencies. Gains were only briefly trimmed after U.S. first-quarter growth was revised up slightly less than expected to 0.8 percent annualized.

Yellen is due to speak at an event hosted by Harvard University at 1:15 p.m. EDT (1715 GMT). Her speech will come after a number of Fed policymakers this week struck hawkish tones on the trajectory of interest rates.

At 9:38 a.m. EDT (1338 GMT), the Canadian dollar CAD=D4 traded at C$1.3056 to the greenback, or 76.59 U.S. cents, weaker than Thursday's close of C$1.2970, or 77.10 U.S. cents.

The currency’s strongest level of the session was C$1.297, while its weakest was C$1.3068.

On Thursday, the loonie posted a one-week high at C$1.2912 as oil briefly moved above $50 a barrel and after the Bank of Canada was less dovish this week than some investors expected, signaling the impact on the economy of the Alberta wildfires will be transitory.

Canadian dollar-implied volatility, which traders use to price options on the currency, has tumbled since the interest rate decision and ahead of a U.S. holiday on Monday. For 3-month options, implied volatility was at 9.35 percent on Friday, near its lowest since January. FXVOL

Canadian government bond prices were slightly lower across the maturity curve in sympathy with U.S. Treasuries. The two-year CA2YT=RR price fell 0.5 Canadian cent to yield 0.62 percent and the benchmark 10-year CA10YT=RR declined 3 Canadian cents to yield 1.334 percent.

The Canada-U.S. two-year bond spread was 1.3 basis points more negative at -26.3 basis points as Treasuries underperformed. On Tuesday, the spread touched its largest gap in near two months at -28.1 basis points.

Reporting by Fergal Smith; Editing by Jeffrey Benkoe