Canadian dollar weakens against the greenback as oil prices fall

(Reuters) - The Canadian dollar weakened on Tuesday, after nearing a nine-month high earlier in the day, as oil prices dropped in response to easing tensions between the United States and Iran.

FILE PHOTO: 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 price of oil, one of Canada's major exports, fell as U.S. President Donald Trump said progress has been made with Iran. U.S. crude oil futures CLc1 settled 3.3% lower at $56.72 a barrel.

“There has been a surprise in U.S.-Iran relations, evidently, that sent oil 3% lower and moved down the Canadian dollar with it,” said Adam Button, chief currency analyst at Forexlive.

The loonie has gained sharply against the greenback in recent days as the Bank of Canada showed no signs it was prepared to lower interest rates anytime soon.

Canadian policy-makers’ current stance come as soft inflation data and global trade disputes have led other central banks including the Federal Reserve to signal they are ready to provide stimulus to counter an economic slowdown.

“The currency has been on a tear the last few weeks. We are taking a breather,” said Mazen Issa, senior FX strategist at TD Securities in New York.

At 4:03 p.m. (2003 GMT), the Canadian dollar CAD=D4 was trading 0.2% lower at 1.3075 to the greenback, or 76.48 U.S. cents. The currency, which last Friday touched a near nine-month high at 1.3018, traded in a range of 1.3023 to 1.3081.

The U.S. dollar .DXY rose against a basket of currencies as surprisingly strong growth in U.S. retail sales in June soothed worries about the American economy and trimmed expectations the Federal Reserve may embark on a deep interest rate cut later this month.

Investors still expect the Fed to lower for the first time in a decade in two weeks, albeit by a more modest quarter-point decrease.

Analysts expect the Bank of Canada may not be able to stay pat on rates for long if the Fed and other major central banks begin cutting rates and/or buying bonds.

“The Bank of Canada can really afford to be patient, but the BoC is going to be pressured to cut rates like the other central banks,” said Alfonso Esparza, senior market analyst at Oanda in Toronto.

Canadian government bond prices were mixed across the yield curve, with the two-year CA2YT=RR up 0.5 Canadian cent to yield 1.564% and the 10-year CA10YT=RR down 1 Canadian cent to yield 1.593%.

Reporting by Levent Uslu; additional reporting by Richard Leong; Editing by Susan Thomas