The Canadian dollar weakened to a more than one-week low against its U.S. counterpart on Wednesday as broad-based gains for the greenback offset an interest rate hike and the prospect of further tightening by the Bank of Canada.
The U.S. dollar rose as the market put aside trade tension fears and focused on an expectation-beating inflation report, which increased prospects that the Federal Reserve will raise interest rates two more times this year.
“This U.S. dollar move offsets and even more so the somewhat hawkish BoC hike,” said Greg Anderson, global head of foreign exchange strategy at BMO Capital Markets in New York.
The Bank of Canada raised its benchmark interest rate by 25 basis points to 1.50 per cent, the fourth hike since last summer.
It said mounting trade tensions with the United States would have a larger impact on investment and exports than previously thought, but it nudged up its estimate for second-quarter economic growth and pointed to rising inflation pressures.
“This should be consistent with a more firm pricing for another hike this year,” said Alvise Marino, FX strategist at Credit Suisse in New York.
Money markets see a nearly 70 per cent chance of further tightening by December.
At 4 p.m. EDT, the Canadian dollar was trading 0.7 per cent lower at $1.3208 to the greenback, or 75.71 U.S. cents.
The currency touched its strongest since June 14 at $1.3064 and its weakest since July 2 at $1.3215.
Losses for the loonie came as the United States threatened tariffs on an additional $200 billion worth of Chinese goods, pressuring stocks and commodity prices.
Canada, which has its own trade dispute with the United States, exports many commodities and runs a current account deficit, so its economy could also be hurt if the flow of trade or capital slows.
U.S. crude oil futures settled 5 per cent lower at $70.38 a barrel.
Canadian government bond prices were mixed across a flatter yield curve, with the two-year down 2 cents to yield 1.948 per cent and the 10-year rising 8 cents to yield 2.141 per cent.
The gap between the two-year yield and its U.S. equivalent narrowed by 3.3 basis points to a spread of -62.6 basis points.