Canadian dollar firms as potential U.S. political gridlock weighs on dollar

By Fergal Smith

TORONTO (Reuters) - The Canadian dollar edged higher against its U.S. counterpart on Wednesday as the greenback broadly fell after U.S. congressional elections, but gains for the loonie were tempered by lower oil prices.

At 3:51 p.m. (2051 GMT), the Canadian dollar was trading 0.1 percent higher at 1.3113 to the greenback, or 76.26 U.S. cents. The currency touched its strongest level since Friday at 1.3057 before paring its gains.

The U.S. dollar (.DXY) slumped to its lowest intraday in more than two weeks against a basket of major currencies after the election outcome of a U.S. Congress split between Republicans and Democrats raised expectations that any major fiscal policy boost to the economy is unlikely for now.

"Given gridlock, you probably don't have as much scope for stimulus as you might otherwise have had," said David Stonehouse, head of fixed income, North American & specialty equities at AGF Investments Inc. "I think it is a more benign outcome for Canada than potentially a Republican sweep might have been when it comes to trade relations."

Canada sends about 75 percent of its exports to the United States. It has reached a deal with the U.S. and Mexico to revamp the North American Free Trade Agreement, but the agreement included no assurance that Washington would lift punitive measures it imposed on Canadian steel and aluminum in June.

The price of oil, one of Canada's major exports, continued a recent slide after surging U.S. crude output hit another record and domestic inventories rose more than expected.

U.S. crude oil futures settled 0.9 percent lower at $61.67 a barrel.

"It is always in the back of people's minds that, to some extent at least, Canada is a petro-currency, and undeniably oil has been soft recently and that hasn't helped the Canadian dollar's cause," Stonehouse said.

Canadian purchasing activity expanded at a faster pace in October as measures of employment and inventories rose, according to Ivey Purchasing Managers Index data. The seasonally adjusted index rebounded to 61.8 after having slumped in September to 50.4, its lowest in more than two years.

Canadian government bond prices were mixed across a slightly flatter yield curve. The 10-year rose 4 Canadian cents to yield 2.529 percent.

(Reporting by Fergal Smith; Editing by Bernadette Baum and Grant McCool)