By Fergal Smith
TORONTO (Reuters) - The Canadian dollar strengthened against its U.S. counterpart on Tuesday as Wall Street rallied and investors weighed whether the Bank of Canada might have to act more aggressively than currently expected to cool the domestic economy.
The loonie advanced 0.5% to 1.3385 per greenback, or 74.71 U.S. cents, after trading in a range of 1.3377 to 1.3457. It was recovering from its weakest intraday level in 11 days on Monday at 1.3495.
Canadian retail sales fell by 0.5% in September from August, matching estimates, but a preliminary estimate for October showed sales rebounding by 1.5%. Other flash estimates were also upbeat, with manufacturing sales rising 2% and wholesale trade up 1.3%.
"It does suggest that the Canadian economy is still moving along at a pretty decent clip," said Shaun Osborne, chief currency strategist at Scotiabank.
"The Bank may have a bit more work to do and the market may be underpricing December risk a little bit."
Canada's central bank has raised borrowing costs aggressively this year in an attempt to reduce demand so that supply can catch up. Money markets expect the BoC to hike a further 25 basis points, rather than 50, at a policy decision next month.
Higher interest rates are starting to slow the Canadian economy, BoC Senior Deputy Governor Carolyn Rogers said.
U.S. stocks rallied and the safe-haven U.S. dollar fell against a basket of major currencies, reversing some of the previous day's move.
Adding to support for the loonie, the price of oil, one of Canada's major exports, settled 1.1% higher as top exporter Saudi Arabia said OPEC+ was sticking with output cuts.
The Canadian 10-year yield touched its lowest level since Aug. 26 at 3.013% before recovering slightly to 3.026%, down 6.1 basis points on the day.
(Reporting by Fergal Smith; Editing by Andrea Ricci and Jonathan Oatis)