Canadian dollar hits 6-month low as bond yields soar

By Fergal Smith

TORONTO (Reuters) - The Canadian dollar weakened to a six-month low against its U.S. counterpart on Tuesday as surging long-term borrowing costs spooked investors and despite hawkish comments from a Bank of Canada policymaker.

The loonie was trading 0.3% lower at 1.3715 to the greenback, or 72.91 U.S. cents, after touching its weakest intraday level since March 27 at 1.3735.

"It's been dragged around with higher U.S. yields, that's for sure," said Amo Sahota, director at Klarity FX in San Francisco. "The U.S. dollar has been on an 11-week run to the upside, so that's not necessarily helping the loonie."

The U.S. dollar added to recent gains against a basket of major currencies, briefly rising above the psychological 150-per-dollar level against the yen, as the sell-off in U.S. Treasuries showed signs of capitulation by major investors.

Canadian businesses have made larger and more frequent price changes since the pandemic, passing on higher costs to consumers, and that behavior could stoke inflation, Bank of Canada Deputy Governor Nicolas Vincent said.

Vincent's comments helped underpin Canadian bond yields, Sahota said, adding that the market is "still gunning for another rate hike" from the Canadian central bank.

Money markets see a 64% chance that the BoC will tighten further by the end of the year. The benchmark rate was lifted in July to a 22-year high of 5%.

The price of oil, one of Canada's major exports, rebounded from a three-week low. U.S. crude oil futures were up 0.8% at $89.57 a barrel.

Canadian government bond yields surged across the curve, playing catch-up with moves in U.S. Treasuries after the Canadian market was closed on Monday.

The 10-year rose to it highest level since November 2007 at 4.292% before easing slightly to 4.268%, up 23.6 basis points on the day.

(Reporting by Fergal Smith; Editing by Richard Chang)