Canadian dollar extends rally as oil benchmark cracks $50/bbl

By Fergal Smith

TORONTO (Reuters) - The Canadian dollar strengthened to a more-than two-and-a-half-year against its U.S. counterpart on Thursday as oil climbed and the greenback broadly lost ground, while the Bank of Canada kept its options open to either expand or scale back stimulus.

The loonie was trading 0.6% higher at 1.2736 to the greenback, or 78.52 U.S. cents. It touched its strongest intraday level since April 2018 at 1.2706.

The move was driven by broad-based weakness in the U.S. dollar and strong commodity prices, said Simon Côté, managing director, risk management solutions, at National Bank Financial.

Oil, one of Canada's major exports, was boosted by hopes that the release of COVID-19 vaccines would lead to a faster demand recovery. U.S. crude oil futures settled 2.8% higher at $46.78 a barrel, while Brent moved above $50 for the first time since March. [O/R]

The U.S. dollar fell against a basket of major currencies as data showed an increase in the number of Americans filing first-time claims for unemployment benefits and after the unveiling of fresh stimulus measures from the European Central Bank failed to pressure the euro.

"We strongly feel that any bounce in the U.S. dollar will be met with strong selling," Côté said. "The trend is there, it's really heavy and we think fighting it is not a good idea."

The Bank of Canada could lower interest rates further without going negative if a second COVID-19 wave worsens, though it could also re-examine current stimulus if a vaccine rollout brightens the outlook, Deputy Governor Paul Beaudry said.

On Wednesday, the central bank gave less attention to recent gains for the loonie than some investors expected, as it left its key interest rate unchanged at 0.25%.

Canadian government bond yields were mixed across a flatter curve, with the 10-year down 1.4 basis points at 0.735%.

(Reporting by Fergal Smith; Editing by Marguerita Choy)