Canadian dollar extends weekly gain on rising investor sentiment

By Fergal Smith

TORONTO (Reuters) - The Canadian dollar strengthened to a two-week high against its U.S. counterpart on Friday as investors grew more optimistic on the outlook for riskier financial assets and weighed prospects of the Bank of Canada resuming interest rate hikes.

The loonie was trading 0.2% higher at C$1.3425 to the greenback, or 74.49 U.S. cents, after touching its strongest intraday level since May 16 at 1.3408. For the week, the currency advanced 1.4%.

"With rebounding market sentiment, yield spreads moving in favour of Canada, and commodities picking up steam, it's been the perfect cocktail for a loonie rally this week," said Jay Zhao-Murray, a market analyst at Monex Canada Inc.

U.S. stock indexes rose after data showed U.S. job growth accelerating in May, but also a surge in the unemployment rate that could give the Federal Reserve cover to skip an interest rate hike this month. The passing of a bill to lift the U.S. debt ceiling, averting a catastrophic default, also cheered investors.

The price of oil, one of Canada's major exports, clawed back some of its weekly decline ahead of a meeting of OPEC and its allies this weekend. U.S. crude futures settled 2.3% higher at $71.74 a barrel.

Greater Toronto Area home prices increased 3.7% in May from April and sales rose sharply, adding to evidence that the housing market is recovering after a year-long slump, a factor that could support additional Bank of Canada rate hikes.

The central bank is due to make an interest rate decision next Wednesday. Money markets see a roughly 40% chance it will raise its benchmark rate for the first time since January.

Canadian government bond yields rose across the curve, tracking moves in U.S. Treasuries. The 10-year was up 6.9 basis points at 3.229%.

(Reporting by Fergal Smith)