Canadian dollar pares weekly decline as stocks rally

By Fergal Smith

TORONTO (Reuters) - The Canadian dollar strengthened against its U.S. counterpart on Friday, clawing back much of this week's decline, as an increase in investor risk appetite offset domestic data showing a surprise decline in retail sales.

The loonie was trading 0.3% higher at 1.3440 to the greenback, or 74.40 U.S. cents, after trading in a range of 1.3437 to 1.3502.

The move higher for the Canadian currency came as the U.S. dollar gave back some of its recent rally against a basket of major currencies and the S&P 500 notched an intraday record high for the first time in two years.

Canada is a major producer of commodities, such as oil, so the loonie tends to be sensitive to shifts in risk appetite.

"You definitely have some risk-on tailwinds," said Michael Goshko, senior market analyst at Convera Canada ULC. "U.S. dollar strength has just faded throughout the day."

The Canadian dollar has recovered some ground after it hit on Wednesday a five-week low at 1.3541. For the week, it was down 0.2%, its third straight weekly decline.

Canadian retail sales fell 0.2% in November from October, falling short of estimates for a flat reading, although initial estimates suggested a rebound in December.

The Bank of Canada is due to make an interest rate decision on Wednesday. The central bank will wait until at least June to cut its key interest rate as price pressures remain sticky, according to a Reuters poll.

The price of oil, one of Canada's major exports, settled 0.9% lower at $73.41 a barrel but still posted a weekly gain, supported by Middle East tensions.

Canadian government bond yields rose across the curve. The 10-year was up nearly 1 basis point at 3.502% after earlier touching its highest level since Dec. 1 at 3.536%.

(Reporting by Fergal Smith; editing by Jonathan Oatis)