Canadian dollar falls for fourth week despite hawkish BoC

By Fergal Smith

TORONTO (Reuters) - The Canadian dollar on Friday posted its biggest decline against the greenback in five months, as oil prices dropped and investors weighed prospects of upsized interest rate hikes by the Federal Reserve and the Bank of Canada to tackle inflation.

The loonie fell 1% to 1.2710 per greenback, or 78.68 U.S. cents, its biggest decline since November last year.

The currency touched its weakest since March 16 at 1.2726 and was down 0.8% for the week, its fourth straight week of declines.

Talk of aggressive Federal Reserve tightening "has certainly lit a fire under the U.S. dollar and U.S. yields and I think the loonie is getting punished on that," said Amo Sahota, director at Klarity FX in San Francisco. "The U.S. is talking 50 basis points like (it's) a breeze now."

The U.S. dollar surged to a more than two-year high against a basket of major currencies, continuing to draw support from Fed Chair Jerome Powell's comments on Thursday that more or less backed a half-percentage-point tightening at next month's policy meeting.

The price of oil, one of Canada's major exports, was burdened by the prospect of higher interest rates, weaker global growth and COVID-19 lockdowns in China hurting demand. U.S. crude futures settled 1.7% lower at $102.07 a barrel.

The Bank of Canada has already hiked in the current tightening cycle by 50 basis points in one single move. It could consider an even larger rate increase, Governor Tiff Macklem said on Thursday.

Money markets have fully priced in a half-point hike by the BoC at the next policy decision on June 1 and see about a 10% chance of a three-quarter-point increase.

The Canadian 2-year yield touched its highest since October 2008 at 2.736% before dipping to 2.661%, up 2.7 basis points on the day.

(Reporting by Fergal Smith; editing by Jonathan Oatis and Sandra Maler)