Canadian dollar rises as BoC plays down rate cut bets

By Fergal Smith

TORONTO (Reuters) -The Canadian dollar strengthened against its U.S. counterpart on Wednesday, as U.S. inflation data weighed on the greenback and the Bank of Canada pushed back against bets that it would shift to cutting interest rates this year.

The Canadian central bank left its benchmark interest rate on hold at 4.50% as expected but struck a hawkish tone.

"The Bank of Canada wants to have the focus still pretty much on what's happening with inflation," said Amo Sahota, director at Klarity FX in San Francisco.

"Even though they think it's a soft landing (for the economy), they still don't want the market to get too far ahead of itself and start thinking about the prospects of rate cuts."

Chances of a BoC interest rate cut by September eased to 20% from 50% before the rate decision, money market data showed.

The Canadian dollar was up 0.2% at 1.3435 to the U.S. dollar, or 74.43 U.S. cents, after trading in a range of 1.3429 to 1.3489.

The gain for the loonie came as data showed U.S. consumer prices rising less than expected in March, raising expectations that the Federal Reserve is likely to stop hiking rates after a possible increase in May.

The U.S. dollar dropped sharply against a basket of major currencies and the price of oil, one of Canada's major exports, added to its recent gains. U.S. crude oil futures settled 2.1% higher at $83.26 a barrel.

The Canadian 2-year yield eased 1.8 basis points to 3.782% as U.S. Treasury yields declined.

The gap between the 2-year and its U.S. equivalent narrowed by 6 basis points to about 20 basis points in favor of the U.S. bond, its smallest since September.

(Reporting by Fergal Smith; Editing by Sharon Singleton and Jonathan Oatis)