C$ rebounds but gains capped by global economic uncertainty

By Fergal Smith

TORONTO (Reuters) - The Canadian dollar strengthened against its U.S. counterpart on Wednesday as oil prices rallied, but gains for the currency were limited by investor nervousness about the global economic outlook.

The loonie was trading 0.3% higher at 1.2988 to the greenback, or 76.99 U.S. cents, after trading in a range of 1.2922 to 1.3039. On Tuesday, the currency touched its weakest level in 18 months at 1.3052.

Higher oil prices gave the Canadian dollar some support but the major focus for investors is the potential for interest rate hikes to slow global economic activity, said Darren Richardson, chief operating officer at Richardson International Currency Exchange Inc, adding that "fear-based trading" is dominating the market.

Wall Street fell after U.S. consumer price index data indicated that inflation is likely to stay hot for a while and keep the Federal Reserve's foot on the brakes to cool demand.

USD-CAD gyrated around the 1.2963 level that marked a peak for the pair in December.

"If the market can close above that number at the end of the week that would probably indicate further strength in the U.S. dollar," Richardson said.

The price of oil, one of Canada's major exports, rebounded after plunging nearly 10% in the previous two sessions, buoyed by supply concerns as flows of Russian gas to Europe fell. U.S. crude oil futures settled nearly 6% higher at $105.71 a barrel.

Bank of Canada Deputy Governor Toni Gravelle is due to speak on Thursday on commodities, growth and inflation, which could offer clues on the outlook for interest rates.

Canadian government bond yields were lower across the curve, tracking the move in U.S. Treasuries. The 10-year eased 2.7 basis points to 2.983%, after touching on Monday its highest in 11 years at 3.173%.

(Reporting by Fergal Smith; Editing by Will Dunham and Sandra Maler)