Canadian dollar hits four-month high on firmer oil, softer greenback

TORONTO (Reuters) - The Canadian dollar touched its strongest level in four months against the greenback on Tuesday, supported by a crude oil rally and a broadly weaker U.S. dollar, which lost ground against a basket of major currencies.

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/File Photo

Prices of oil, one of Canada’s major exports, hit a one-week high on the back of a weaker greenback, short covering and expectations that crude inventories may decline.

The U.S. dollar .DXY hit 10-month lows against the euro, which firmed after the European Central Bank opened the door to tweaks that might begin to reduce the central bank's emergency stimulus to the economy shortly.

The International Monetary Fund also cut its growth forecasts for the U.S. economy citing uncertainty over President Donald Trump’s fiscal plan.

“A number of things are coming together here,” said Shaun Osborne, chief currency strategist at Scotiabank, noting that the U.S. economic growth advantage has shrunk considerably in recent months as the global economy performed better.

“That’s particularly the case with Canada, where the Canadian economy seems to be on a bit of a roll at the moment.”

At 4:00 p.m. ET (2000 GMT), the Canadian dollar CAD=D4 was trading at C$1.3166 to the greenback, or 75.95 U.S. cents, up 0.6 percent.

The currency touched C$1.3148, its strongest level since Feb. 27. Its weakest level of the session was C$1.3260.

“The 800lb gorilla in the room is the very large CAD short we still had on Friday,” Osborne added. “You’ve got to think some of the CAD strength is related to position adjustment as those shorts gets squeezed out.”

Speculators cut bearish bets on the loonie for a fourth straight week, data from the U.S. Commodity Futures Trading Commission and Reuters calculations showed on Friday. Canadian dollar net short positions fell to 82,881 contracts as of June 20 from 88,595 a week earlier.

The currency’s gains came ahead of remarks on Wednesday by Bank of Canada Governor Stephen Poloz, who will be participating in a panel discussion at the European Central Bank’s Forum on Central Banking.

Canadian government bond prices were lower across the yield curve, with the two-year CA2YT=RR price down 13 Canadian cents to yield 0.975 percent and the 10-year CA10YT=RR declining 95 Canadian cents to yield 1.570 percent.

The gap between Canada’s two-year yield and its U.S. equivalent narrowed by 4.3 basis points to a spread of -40.6 basis points as Canadian bonds underperformed.

Additional reporting by Fergal Smith; Editing by Nick Zieminski and Tom Brown