Canadian dollar pads recent gains on Fed's dovish message

By Fergal Smith

TORONTO (Reuters) - The Canadian dollar rose to a three-year high against its U.S. counterpart on Wednesday, after a dovish forecast by the Federal Reserve for the path of interest rate hikes pressured the greenback and domestic data showed inflation edging higher.

The U.S. dollar fell against a basket of major currencies and Wall Street rallied, after the Fed repeated its pledge to keep its target interest rate near zero for years to come even as it projected a rapid jump in U.S. economic growth and inflation this year.

"This very dovish messaging has forced some hawkish rate bets to reverse," said Erik Bregar, head of FX strategy at the Exchange Bank of Canada.

It has bolstered "risk-sensitive currencies like the Canadian dollar," Bregar said.

The Canadian dollar was trading 0.3% higher at 1.2410 to the greenback, or 80.58 U.S. cents, its strongest level since February 2018.

Canada's annual inflation rate rose to 1.1% in February from 1.0% in January on rising gasoline prices, although the slight acceleration was below analyst expectations.

"The CPI report is consistent with steady, accommodative policy from the BoC for an extended period," said Ryan Brecht, a senior economist at Action Economics.

Still, strategists expect Canada's central bank to cut its bond purchases next month.

The price of oil, one of Canada's major exports, slipped for a fourth day, weighed down by expectations of weaker demand in Europe and by rising U.S. crude inventories. U.S. crude prices settled 0.3% lower at $64.60 a barrel.

Canadian government bond yields were mixed across a steeper curve in sympathy with U.S. Treasuries. The 10-year yield touched its highest level since January 2020 at 1.633% before dipping to 1.576%, up less than 1 basis point on the day.

(Reporting by Fergal Smith; Editing by Jonathan Oatis and Peter Cooney)