Canadian dollar pares weekly gain as Fed rate decision looms

By Fergal Smith

TORONTO (Reuters) - The Canadian dollar weakened against its U.S. counterpart on Friday, giving back some of its weekly advance, as attention turned to a Federal Reserve interest rate decision next week, while data showed surprise growth in the domestic economy.

The loonie was down 0.3% at 1.3610 to the greenback, or 73.48 U.S. cents, pulling back from its strongest intraday level in nearly five weeks on Thursday at 1.3493.

For the week, it was up 0.2%

"I think USD-CAD bears are a little disappointed that it couldn't crack the October lows around 1.35," said Amo Sahota, director at Klarity FX in San Francisco.

"This is a consolidation day. It's holding for the FOMC (Federal Open Market Committee) next week."

Money markets expect the Fed to raise interest rates by three-quarters of a percentage point at a policy announcement next Wednesday. Hopes that the central bank will then slow the pace of tightening have boosted equity markets in recent days.

The Canadian economy grew by 0.1% in August, compared with expectations for no growth, and likely expanded another 0.1% in September.

"The (August) GDP number was an encouraging sign," Sahota said "It means that the Bank of Canada does have a little room to raise interest rates."

On Wednesday, the BoC hiked by half a percentage point to 3.75%. That was less than investors had expected but still left rates at the highest level in 14-years.

The price of oil, one of Canada's major exports, fell after China widened its COVID-19 curbs. U.S. crude prices settled 1.3% lower at $87.90 a barrel.

Canadian government bond yields were higher across much of the curve, tracking the move in U.S. Treasuries.

The 10-year rose 3.8 basis points to 3.237% after hitting on Thursday its lowest intraday level in more than three weeks at 3.176%.

(Reporting by Fergal Smith; Editing by Alistair Bell and Marguerita Choy)