C$ rallies as GDP beats estimates, Fed shifts gear

By Fergal Smith

TORONTO (Reuters) -The Canadian dollar strengthened to a one-week high against its U.S. counterpart on Wednesday as data showed faster-than-expected growth in Canada's economy and the Federal Reserve signaled a possible move to cutting interest rates.

The loonie was trading 0.3% higher at 1.3810 per U.S. dollar, or 72.41 U.S. cents, after touching its strongest intraday level since last Wednesday at 1.3788.

Canada's gross domestic product grew by 0.2% in May, above estimates for a 0.1% increase, while a preliminary estimate for June showed the economy expanded by 0.1%, taking the quarterly economic growth rate to 2.2%.

Last week, the Bank of Canada forecast second-quarter growth of 1.5% as it cut interest rates for a second time since June, lowering its benchmark rate by 25 basis points to 4.50%.

"These latest GDP figures should tamp down talk of the Bank being wildly behind the curve, and quiet rumblings about the BoC potentially looking at a 50 bp (basis point) cut," Doug Porter, chief economist at BMO Capital Markets, said in a note.

"Canada's economy is still walking that fine line of struggling to keep upright, but just staying out of serious trouble, consistent with continued, measured interest rate cuts."

The U.S. dollar lost ground against a basket of major currencies as the Bank of Japan raised rates, boosting the yen, and the Fed held rates steady but opened the door to reducing borrowing costs as soon as its next meeting in September.

The price of oil, one of Canada's major exports, rebounded from seven-week lows, settling 4.3% higher at $77.91 a barrel, as tensions increased in the Middle East.

Canadian government bond yields were mixed across a flatter curve. The 2-year was up 1.9 basis points at 3.520%, after earlier touching its lowest level since April 2023 at 3.469%.

(Reporting by Fergal Smith; Editing by Nick Zieminski and Leslie Adler)