Canadian dollar recovers from one-week low ahead of Fed rate decision

TORONTO (Reuters) - The Canadian dollar edged higher against its U.S. counterpart on Wednesday, with the currency recovering from an earlier one-week low ahead of an expected interest rate hike by the Federal Reserve.

At 9:20 a.m. EDT (1320 GMT), the Canadian dollar was trading 0.1 percent higher at C$1.2994 to the greenback, or 76.96 U.S. cents. The currency touched its weakest level since June 5 at C$1.3046.

Traders' expectations for a Fed rate hike on Wednesday were reinforced by a stronger-than-forecast increase in U.S. producer prices in May. It would be the second tightening this year by the U.S. central bank.

The Bank of Canada has also raised interest rates once this year. Chances of another hike at its next meeting in July have eased to about 62 percent from more than 70 percent before a G7 summit in Canada at the weekend, data from the overnight index swaps market showed.

U.S. President Donald Trump backed out of a joint communique agreed by Group of Seven leaders that mentioned the need for "free, fair and mutually beneficial" trade and the importance of fighting protectionism.

He also attacked Canadian Prime Minister Justin Trudeau in their feud over trade.

The spat comes amid slow-moving talks between Canada, the United States and Mexico to modernize the North American Free Trade Agreement (NAFTA). Canada sends about 75 percent of its exports to the United States, so its economy could be hurt if NAFTA were scrapped.

U.S. crude oil futures were down 0.5 percent at $66.02 a barrel. Oil is one of Canada's major exports.

Canadian government bond prices were mixed across a flatter yield curve, with the two-year down 0.5 Canadian cent to yield 1.905 percent and the 10-year rising 6 Canadian cents to yield 2.291 percent.

The gap between Canada's 2-year yield and its U.S. counterpart widened by 0.5 basis point to a spread of -64.4 basis points, its widest since April 2007.

(Reporting by Fergal Smith; editing by Jonathan Oatis)