Canadian dollar hits 20-month low on global risk aversion

By Fergal Smith

TORONTO (Reuters) - The Canadian dollar weakened by more than 1% against the greenback on Thursday, while also losing ground against most other G10 currencies, as the potential for aggressive tightening by the U.S. Federal Reserve this month pressured financial markets.

Equities globally and the price of oil, one of Canada's major exports, fell and the safe-haven U.S. dollar rallied against a basket of major currencies after the latest red-hot U.S. inflation reading increased investor fears about Fed rate hikes and a possible recession.

U.S. crude prices settled 0.5% lower at $95.78 a barrel, after clawing back much of its earlier decline. [O/R]

On Wednesday, the Bank of Canada unveiled a "shock-and-awe" full-percentage-point interest rate hike, a surprise move that marked a change in messaging for a central bank desperate to show it can tame the worst inflation since 1983, analysts said.

"Risk aversion is dragging the CAD lower after the BoC's bold move yesterday," strategists at Scotiabank, including Shaun Osborne, said in a note, adding that speculation the Fed could hike by 100 basis points is driving "risk-off trading."

The Canadian dollar was trading 1.1% lower at 1.3110 to the greenback, or 76.28 U.S. cents, after touching its weakest since November 2020 at 1.3223. Among G10 currencies, only the Japanese yen posted a bigger decline.

Canadian factory sales fell by 2.0% in May from April, matching estimates, on lower sales in motor vehicles, as well as primary metals, data from Statistics Canada showed.

Canadian government bond yields were mixed across the curve.

The 10-year eased about half a basis point to 3.149%, which left the gap between it and the equivalent U.S. yield trading 6.7 basis points narrower at 18.6 basis points in favor of the Canadian bond.

(Reporting by Fergal Smith; Editing by Alison Williams and Marguerita Choy)