Canadian dollar rebounds as Fed keeps rate cuts on the table

By Fergal Smith

TORONTO (Reuters) - The Canadian dollar strengthened against its U.S. counterpart on Wednesday, clawing back some of the previous day's sharp decline, as the Federal Reserve's signaling about prospects for interest rate cuts was not as hawkish as some investors had feared.

The loonie was trading 0.5% higher at 1.3710 to the U.S. dollar, or 72.94 U.S. cents, after it touched intraday on Tuesday an 11-day low at 1.3784.

The currency has been pressured in recent weeks by a wider gap between U.S. and Canadian yields as investors anticipated a delayed start to Fed rate cuts.

The U.S. central bank on Wednesday held interest rates steady and signaled it is still leaning towards eventual reductions in borrowing costs, but put a red flag on recent disappointing inflation readings and suggested a possible stall in the movement towards more balance in the economy.

"It seems like Fed officials are opting to simply tweak their previous plans rather throw them out the window," said Royce Mendes, managing director and head of macro strategy at Desjardins.

The U.S. dollar fell against a basket of major currencies after the Fed decision.

Canadian manufacturing activity slowed in April, extending a lengthy period of contraction for the sector. The S&P Global Canada Manufacturing Purchasing Managers' Index (PMI) fell to a seasonally adjusted 49.4 in April from 49.8 in March, staying below the 50 threshold for the 12th straight month.

The price of oil, one of Canada's major exports, settled 3.6% lower at $79.00 a barrel on a surprise build in U.S. crude stocks and the prospect of a Middle East ceasefire agreement.

Canadian government bond yields fell across the curve, tracking moves in U.S. Treasuries. The 10-year was down 8.8 basis points at 3.730%.

(Reporting by Fergal Smith; editing by Jonathan Oatis)