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Canadian dollar holds near 14-month highs as rally stalls, Fed in focus

The Canadian dollar was steady against the greenback on Tuesday after briefly touching a 14-month high, as the U.S. currency pared earlier losses ahead of the Federal Reserve's next policy announcement.

The Canadian dollar, which has gained some 10 per cent since early May, failed to crack $1.2480 against the U.S. dollar, or 80.13 U.S. cents, after breaching $1.25 on Monday, even as oil prices rallied 3 per cent.

"I think we stalled out here a little bit. We've had three good go's at breaking the $1.2480 level," said Shaun Osborne, chief currency strategist at Scotiabank, who maintaining a $1.28 year-end forecast.

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"After a 10 per cent rally in the CAD, it's probably getting close to the end of the road."

Osborne noted that the U.S. dollar tended to rally during the second half of the year, and that the Canadian dollar also appeared to be "completely disconnected" from the price of crude oil, a key Canadian export.

At 4 p.m. (2000 GMT), the Canadian dollar was trading at $1.2505, or 79.97 U.S. cents, little changed from Monday's close.

The currency's strongest level of the session was $1.2481, while its weakest level was $1.2533.

The next key level to watch is $1.2461, or 80.25 U.S. cents, reached in May 2016.

The U.S. dollar, which earlier touched a 13-month low against a basket of major currencies, has fallen nearly 4 per cent over the past month and more than 8 per cent this year.

The Fed began its meeting on Tuesday, but the market was not expecting a change in interest rates. Investors remained wary of the short-term U.S. economic outlook amid uncertainty surrounding the U.S. healthcare vote and an investigation into allegations of Russian meddling in the 2016 U.S. election.

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In Canada, markets have fully priced in the expectation that the Bank of Canada will raise interest rates one more time by the end of the year.

The spread between yields of Canadian and U.S. 2-year bonds has narrowed sharply since early June and was at 6.8 basis points, its narrowest since October 2015.

Canadian government bond prices were lower across the maturity curve, with the two-year down 8.5 Canadian cents to yield 1.322 per cent and the benchmark 10-year down 80 Canadian cents to yield 2.018 per cent.

The two-year bond yield was at its highest in more than five years, while the 10-year bond yield was at its highest since November 2014.

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