C$ dips as investors 'lighten up' on dollar shorts ahead of Fed decision

TORONTO (Reuters) - The Canadian dollar edged lower against its U.S. counterpart on Tuesday as investors scaled back bets against the greenback ahead of a Federal Reserve interest rate decision, with the loonie unable to get a lift from encouraging domestic data.

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 loonie CAD= was trading 0.1% lower at 1.3185 to the greenback, or 75.84 U.S. cents. The currency traded in a range of 1.3134 to 1.3202.

The market is “seeing some entrenched USD shorts lighten up here ahead of a Fed meeting that likely won’t deliver anything new when it comes to ‘actual’ policy action,” said Erik Bregar, head of FX strategy at the Exchange Bank of Canada.

The Fed’s interest rate decision is due on Wednesday, which will be the first since it unveiled a landmark shift to a more tolerant stance on inflation in August.

The U.S. dollar .DXY clawed back much of its decline against a basket of major currencies, while U.S. crude oil futures CLc1 settled 2.7% higher at $38.28 a barrel. Oil is one of Canada's major exports.

“I think USD-CAD traders have been right to ignore today’s rise in crude because it’s not a demand story, but simply the market pricing in some Hurricane Sally risk,” Bregar said.

Canadian factory sales rose for the third straight month in July, climbing 7.0% from June, Statistics Canada said.

Separate data, from the Canadian Real Estate Association, showed that home sales increased 6.2% in August to reach a record high.

Canada’s inflation report for August is due on Wednesday, while the July retail sales report is set for Friday.

Canadian government bond yields were little changed across much of the curve, with the 10-year CA10YT=RR up less than half a basis point at 0.558%.

Reporting by Fergal Smith; Editing by Nick Zieminski and Peter Cooney