Canadian dollar lags G10 peers as oil prices tumble

By Fergal Smith

TORONTO (Reuters) - The Canadian dollar weakened against its U.S. counterpart on Tuesday as oil prices fell and investors weighed prospects that the Bank of Canada could be among the first major central banks to lower interest rates in the coming months.

The loonie was trading 0.3% lower at 1.3610 to the greenback, or 73.48 U.S. cents, marking the biggest decline among G10 currencies. It moved in a range of 1.3546 to 1.3618.

The U.S. dollar pared losses against a basket of major currencies and the price of oil, one of Canada's major exports, fell to a 5-1/2-month low as investors weighed the potential impact of U.S. inflation data on the Federal Reserve's policy outlook.

U.S. crude prices were down nearly 4% at $68.5 a barrel.

The move lower for the Canadian dollar is partly due to the drop in oil but also the market's perception of likely future moves by the Bank of Canada, said Marc Chandler, chief market strategist at Bannockburn Global Forex LLC.

"Just like they were one of the first central banks to tighten in the G10, they seem to be one of the first central banks to ease in 2024," Chandler said.

Money markets expect the BoC to lower its benchmark rate from its current setting of 5%, a 22-year high, as soon as April.

Still, analysts say that the recent easing of financial conditions will likely make it more difficult for the central bank to tame inflation and could delay a shift to rate cuts if it leads to a reheating of activity in the housing market.

Canadian government bond yields were mixed across the curve. The 10-year fell 1.1 basis points to 3.411% but was holding above the 5-month low it hit last Wednesday at 3.264%.

(Reporting by Fergal Smith; editing by Grant McCool)