Canadian dollar retreats from four-week high as greenback bounces on easing fears

TORONTO (Reuters) - The Canadian dollar pulled back from a four-week high on Tuesday against a stronger greenback that recovered from multi-year lows as nerves calmed over North Korea’s missile launch over Japan.

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 U.S. dollar .DXY rebounded from its lowest level since January 2015 against a basket of major currencies, as a recovery in equity markets also helped calm fears sparked by North Korea's missile test. [FRX/][.N]

At 4:00 p.m. ET (2000 GMT), the Canadian dollar CAD=D4 was trading at C$1.2524 to the greenback, or 79.85 U.S. cents, down 0.2 percent.

The currency’s weakest level of the session was C$1.2550, and it touched the strongest since July 31 at C$1.2440.

“More broadly, the Canadian dollar has weakened a little bit over the past couple of days. That’s somewhat expected,” said Benjamin Reitzes, senior economist and foreign exchange strategist at BMO Capital Markets.

“Positioning is long Canadian dollars generally, and there’s probably not a lot of room to go on that front, from a strengthening perspective.”

Prices of oil, one of Canada’s major exports, extended the previous session’s losses as the market grappled with the fallout from Tropical Storm Harvey. More than 16 percent of U.S. refining capacity has been shutdown in the face of unprecedented flooding in the region.

Canadian producer prices declined by 1.5 percent in July from June on lower prices for motorized and recreational vehicles, Statistics Canada said.

Canada’s gross domestic product data for the second quarter is due on Thursday. With a string of robust data during the quarter, markets have almost fully priced in an October interest rate hike by the Bank of Canada.

Reitzes said some softer June data likely indicates the beginning of the end of Canada’s strong growth run, however, which he said would be difficult to replicate.

Canadian government bond prices were higher across the yield curve, with the two-year CA2YT=RR price up 4 Canadian cents to yield 1.245 percent, and the benchmark 10-year CA10YT=RR rising 27 Canadian cents to yield 1.836 percent. The 10-year yield touched its lowest intraday level since July 6 at 1.805 percent.

Canada sold C$750 million of its ultra-long bond, the first reopening since November 2014, at an allotment yield of 2.220 percent, according to the Bank of Canada.

Analysts said the auction went very well and garnered strong demand. Reopening of the ultra-long bond came after the central bank raised interest rates last month for the first time in nearly seven years, pushing up borrowing costs for shorter-dated issues. Yields on longer-dated bonds have held at historically low levels.

Additional reporting by Fergal Smith; Editing by Meredith Mazzilli and Richard Chang