Canadian dollar hits seven-week low as Fed plays catch-up with BoC

·2 min read
FILE PHOTO: A Canadian dollar coin, commonly known as the "Loonie", is pictured in this illustration picture taken in Toronto

By Fergal Smith

TORONTO (Reuters) - The Canadian dollar weakened by the most in four months against its U.S. counterpart on Wednesday as the Federal Reserve brought forward its projections for the first post-pandemic interest rate hikes, closing the gap between it and the Bank of Canada.

Fed policymakers at the median now see the first rate increase coming in 2023 instead of 2024, while the central bank opened the debate on when and how it may be appropriate to start tapering its massive bond-buying program.

Canada's central bank has already begun to taper quantitative easing and has signaled it could begin lifting its key rate from a record low of 0.25% in the second half of next year.

"The market was certain that the Bank of Canada would be the first to hike rates by a considerable margin," said Adam Button, chief currency analyst at ForexLive. "Now the Federal Reserve has had a change of heart and could be hiking sooner than believed."

The Canadian dollar was trading 0.7% lower at 1.2277 to the greenback, or 81.45 U.S. cents, its biggest decline since February.

It touched its weakest level since May 6 at 1.2279. Earlier this month, it notched a six-year high at 1.2007.

Canada's annual inflation rate accelerated to 3.6% in May from 3.4% in April, driven by surging shelter and passenger vehicles prices, Statistics Canada said. That was slightly ahead of analyst expectations and the highest since May 2011.

Oil, one of Canada's major exports, notched its highest level since October 2018 at $72.99 a barrel before settling at $72.15, up three cents on the day.

Canadian government bond yields rose across the curve, tracking the move in U.S. Treasuries. The 10-year was up 4.9 basis points at 1.432%.

(Reporting by Fergal Smith; Editing by Andrea Ricci and Alistair Bell)

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