Canadian dollar dips as oil prices fall more than 4%

By Fergal Smith

TORONTO (Reuters) - The Canadian dollar edged lower against its U.S. counterpart on Tuesday as a drop in oil prices offset optimism that a deal to raise the U.S. debt ceiling would be passed by Congress.

The loonie was trading 0.1% lower at 1.36 to the greenback, or 73.53 U.S. cents, after moving in a range of 1.3568 to 1.3613.

"Under the hood, in terms of the fundamentals, you have got yield spreads giving it support and then weaker oil prices moving against it," said Eric Theoret, global macro strategist at Manulife Investment Management.

The price of oil, one of Canada's major exports, settled 4.4% lower at $69.46 a barrel as mixed messages from major producers clouded the supply outlook ahead of the OPEC+ meeting this weekend.

U.S. bond yields fell as worries receded that the United States would default on its debt, while the gap between the Canadian 2-year yield and its U.S. equivalent narrowed by 5.6 basis points to about 20 basis points in favor of the U.S. bond.

The move in yield spreads came as investors awaited Canadian first-quarter GDP data on Tuesday, which could offer clues on the Bank of Canada policy outlook. Money markets see a roughly 30% chance the central bank would hike next week for the first time since January.

Data on Tuesday showed that Canada's current account deficit narrowed to C$6.17 billion ($4.61 billion) in the first quarter from an upwardly revised C$8.05 billion deficit in the fourth quarter.

The Canadian 10-year yield was down 6.3 basis points at 3.268%, tracking the move in U.S. Treasuries.

(Reporting by Fergal Smith; Editing by Will Dunham)