Canadian dollar rebounds from seven-week low on Bank of Canada comments

TORONTO (Reuters) - The Canadian dollar strengthened against the greenback on Thursday, recovering from a nearly seven-week low earlier in the day after a senior Bank of Canada official said the central bank had discussed the pace at which it could raise interest rates.

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

On Wednesday, the Bank of Canada left its policy rate on hold at 1.50 percent.

The central bank discussed whether the gradual approach to raising rates that it has been taking over the past year remained appropriate, Bank of Canada Senior Deputy Governor Carolyn Wilkins said in a speech.

Wilkins indicated the central bank may be forced to raise interest rates if talks to renegotiate the North American Free Trade Agreement fail, saying protectionist measures could spur inflation.

“On balance, a shift to a faster pace of rate hikes seems more likely than any kind of pause,” said Adam Button, a currency analyst at ForexLive.

At 3:12 p.m. (1912 GMT), the Canadian dollar CAD=D4 was trading 0.3 percent higher at C$1.3139 to the greenback, or 76.11 U.S. cents.

The currency’s strongest level of the session was C$1.3128, while it touched its weakest since July 20 at C$1.3226.

The loonie had been pressured by the prospect of an escalation in a trade dispute between the United States and China, with U.S. President Donald Trump gearing up to impose tariffs on $200 billion in Chinese goods and Beijing certain to retaliate against any measures.

Canada exports many commodities and runs a current account deficit, so its economy could be hurt if the global flow of trade or capital slows.

“Canadian dollar traders are trying to balance the positive risks of a NAFTA deal and the negative risks of a China trade war,” Button said.

U.S. and Canadian negotiators started a second day of talks aimed at rescuing NAFTA as the deadline for a deal this week, set out by Trump, inched closer.

The price of oil, one of Canada's major exports, fell as emerging market woes weighed on sentiment. U.S. crude CLc1 prices settled 1.4 percent lower at $67.77 a barrel.

The value of Canadian building permits decreased by 0.1 percent in July from June, Statistics Canada said.

Canada’s jobs report for August is due on Friday.

Canadian government bond prices were mixed across a flatter yield curve, with the two-year CA2YT=RR down 2.5 Canadian cents to yield 2.064 percent and the 10-year CA10YT=RR rising 12 Canadian cents to yield 2.227 percent.

Reporting by Fergal Smith; Editing by Bernadette Baum and Peter Cooney