Canadian dollar clings to weekly gain as greenback's appeal fades

TORONTO (Reuters) - The Canadian dollar edged lower against its U.S. counterpart on Friday but held near an earlier five-week high as the reduction of some global investment risks weighed on the greenback.

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 U.S. dollar .DXY weakened against a basket of major currencies, pressured by the sapping of safe-haven demand after the announcement of an initial trade deal between the United States and China and an election victory for Britain's Brexit-backing Conservative Party.

“I think CAD was caught in this broader U.S. dollar move,” said Simon Côté, managing director, risk management solutions at National Bank Financial. “We are at risk of seeing more dollar weakness and I just advise our clients not to be complacent.”

Historically cheap rates for the market's pricing of expected volatility showed that investors were not prepared for a major move in the U.S. dollar, even though it was testing key support levels against a number of major currencies, including euro EUR=, sterling GBP= and the Mexican peso MXN=, Côté said.

Canadian dollar six-month volatility CAD6MO was trading at an annualized rate of less than 4.5%, which was near a record low.

At 3:06 p.m. (2006 GMT), the Canadian dollar CAD=D4 was trading 0.1% lower at 1.3189 to the greenback, or 75.82 U.S. cents. The currency touched its strongest intraday level since Nov. 6 at 1.3151.

For the week, the loonie was up 0.5%.

The price of oil, one of Canada's major exports, rose to its highest in nearly three months as investors cheered progress in resolving the U.S.-China trade dispute and a decisive general election result in Britain. U.S. crude oil futures CLc1 settled 1.5% higher at $60.07 a barrel.

The ratio of Canadian household debt-to-income widened to 174.0% in the third quarter from a downwardly revised 173.4% in the second quarter, Statistics Canada said.

The Bank of Canada has worried that an interest rate cut could add to near record levels of household indebtedness.

On Thursday, Bank of Canada Governor Stephen Poloz said a recent weakening in Canada’s labor market, underscored by major job losses in November, is unlikely to weigh heavily on future monetary policy decisions.

Canadian government bond prices were higher across a flatter yield curve in sympathy with U.S. Treasuries. The two-year CA2YT=RR rose 7 Canadian cents to yield 1.663% and the 10-year CA10YT=RR was up 77 Canadian cents to yield 1.585%.

Earlier in the day, the 10-year yield touched its highest level since May 23 at 1.695%.

Reporting by Fergal Smith; Editing by Steve Orlofsky and Nick Zieminski