By Fergal Smith
TORONTO (Reuters) - The Canadian dollar strengthened against its U.S. counterpart on Monday as stocks rose and investors braced for the potential of a more upbeat economic assessment by the Bank of Canada at an interest rate decision this week.
The central bank has not raised interest rates since January, mindful of a slowdown in the domestic economy and an uncertain outlook for the North American Free Trade Agreement.
But prospects of a deal to revamp NAFTA have since improved, oil prices have climbed to a three-year high and inflation has climbed above the Bank of Canada's 2 percent target.
"The bank could be in a much more upbeat mood come Wednesday," said Michael Goshko, corporate risk manager at Western Union Business Solutions. "The stars are aligned for something more aggressive than the markets are currently pricing in."
Another rate hike is not expected by investors until July, the overnight index swaps market showed.
Wall Street climbed as investors appeared less concerned about possible retaliation for the U.S.-led missile attack in Syria.
The commodity-linked Canadian dollar tends to track the movement in the stock market because of the signal it sends about prospects for global growth.
Waning tensions in the Middle East weighed on the price of oil, one of Canada's major exports. U.S. crude oil futures
But the prospects for Canadian crude, which tends to trade at a discount to West Texas Intermediate, improved after Canadian Prime Minister Justin Trudeau moved the day before to end an escalating crisis over a Kinder Morgan Canada Ltd (Toronto:KML.TO - News) oil pipeline.
At 4 p.m. (2000 GMT), the Canadian dollar CAD=D4 was trading 0.3 percent higher at C$1.2573 to the greenback, or 79.54 U.S. cents.
The currency traded in a range of C$1.2566 to C$1.2623. On Wednesday, the loonie reached its strongest level in more than seven weeks at C$1.2545.
Gains for the loonie came on Monday as the U.S. dollar fell against a basket of major currencies.
Canadian government bond prices were lower across a steeper yield curve, with the two-year
The 10-year yield touched its highest level since March 21 at 2.292 percent.
(Reporting by Fergal Smith; Editing by Peter Cooney)