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Canadian dollar pares gains as Fed signals earlier rate hikes

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·2 min read
FILE PHOTO: A Canadian dollar coin, commonly known as the "Loonie", is pictured in this illustration picture taken in Toronto
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By Fergal Smith

TORONTO (Reuters) - The Canadian dollar strengthened to a five-day high against the greenback on Wednesday as worries about the potential collapse of property developer China Evergrande receded, but gains were capped by a hawkish shift in guidance from the Federal Reserve.

Shares globally gained ground as China Evergrande struck a deal to pay a coupon on one of its domestic bonds. Worries over a possible default by China's No. 2 property developer have weighed on financial markets in recent days.

The news out of China "broadly lifted risk sentiment and risk currencies like the Canadian dollar," said Erik Bregar, an independent FX analyst.

Canada is a major exporter of commodities, including oil, so the loonie tends to be sensitive to investor appetite for risk.

Oil prices increased as U.S. crude stocks fell to their lowest levels in three years on a recovery in refining activity after recent storms.

U.S. crude futures settled 2.5% higher at $72.23 a barrel, while the Canadian dollar was up 0.5% at 1.2753 per greenback, or 78.41 U.S. cents.

It touched its strongest intraday level since last Friday at 1.2698 before paring gains.

The Fed's hawkish message took "some of the optimism out of stocks and the Canadian dollar," Bregar said.

The U.S. central bank cleared the way to reduce its monthly bond purchases "soon" and signaled interest rate increases may follow more quickly than expected.

A preliminary estimate showed that Canadian factory sales rose 0.5% in August, driven by higher sales of petroleum and coal products, chemical and primary metal industries.

Canadian retail sales data for July is due on Thursday, which could help guide expectations for the Bank of Canada policy outlook.

Canadian government bond yields were mixed across the curve, with the 10-year little changed at 1.231%.

(Reporting by Fergal Smith; Editing by Paul Simao and Peter Cooney)

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