By Fergal Smith
TORONTO (Reuters) - The Canadian dollar weakened against its U.S. counterpart on Thursday as the greenback notched broad-based gains and despite a signal by Bank of Canada Governor Tiff Macklem that the central bank would continue to hike interest rates aggressively.
The loonie was down 0.9% at 1.3740 to the greenback, or 72.78 U.S. cents, moving back in sight of last Friday's two-year low at 1.3838.
"It was predominantly a broad (U.S.) dollar move," said Bipan Rai, North America head of FX strategy at CIBC Capital Markets.
"You read Macklem's speech and it's pretty hawkish. ... In particular, he pointed to the recent weakness in the Canadian dollar and tied it a little bit more than I thought he would to incoming policy decisions."
The loonie has weakened 8% against the U.S. dollar since the start of 2022. That's a better performance than other G10 currencies except for the Swiss franc, though most of that decline has come since mid-August.
Macklem said the currency's recent weakness will offset some easing of inflation pressures that could come from improving global supply chains and lower commodity prices and made clear the central bank will not yet be pivoting away from its current rapid pace of interest rate increases.
Money markets raised bets on a 50-basis-point hike at the BoC's next policy announcement on Oct. 26, pricing in a 70% chance of such a move versus roughly 50% before the governor's speech.
The U.S. dollar climbed against a basket of major currencies and Wall Street's main indexes fell as optimism faded that the Federal Reserve will go easy with its rapid tightening.
Canadian government bond yields rose across a more deeply inverted curve, with the 2-year moving above the 4% threshold for the first time since October 2007. It was up 14.7 basis points at 4.013%.
(Reporting by Fergal Smith; Editing by Paul Simao and Jonathan Oatis)