Canadian dollar notches one-week high as stock market volatility cools

By Fergal Smith

TORONTO (Reuters) - The Canadian dollar strengthened to a one-week high against its U.S. counterpart on Wednesday as a rally in stocks suggested that the turbulence in financial markets is fading.

At 4:05 p.m. EST (2100 GMT), the Canadian dollar was trading 0.7 percent higher at C$1.2503 to the greenback, or 79.98 U.S. cents.

The currency's weakest level of the session was C$1.2649, while it touched its strongest since Feb. 7 at C$1.2502.

U.S. stocks rose as investors shrugged off stronger-than-expected inflation data and a surprise drop in January retail sales, which shifted the focus from rising inflation to the prospect of stagflation. [.N]

The VIX index (.VIX), a popular options-based gauge of expected stock market volatility, hit its lowest since Feb. 5.

Canada's commodity-linked currency had fallen as much as 3.3 percent after Wall Street lurched sharply lower earlier this month.

"That period of turbulence is starting to dissipate," said Eric Theoret, a currency strategist at Scotiabank. "With the skies becoming a bit clearer, it does pave the way for the fundamental moves that we and many market participants are expecting."

Moves that Theoret is looking for include broad-based U.S. dollar weakness and strength in commodities on strong global growth.

The price of oil, one of Canada's major exports, rebounded from earlier losses after U.S. crude stocks rose less than expected and Saudi Energy Minister Khalid al-Falih said major oil producers would prefer tighter markets than to end supply cuts too early. [O/R]

U.S. crude oil futures settled 2.4 percent higher at $60.60 a barrel, while the U.S. dollar (.DXY) fell against a basket of major currencies.

In domestic data, the Teranet-National Bank Composite House Price Index, which measures changes for repeat sales of single-family homes, showed prices rose 0.3 percent in January from a month earlier. But the pace of gains continued to decelerate on a year-over-year basis.

The Canadian Real Estate Association will release its monthly home sales report on Thursday. Canada's manufacturing sales report for December is due on Friday.

Canadian government bond prices were lower across the yield curve in sympathy with U.S. Treasuries. The two-year was down 8.5 Canadian cents to yield 1.829 percent and the 10-year declined 27 Canadian cents to yield 2.374 percent.

(Reporting by Fergal Smith; Editing by Meredith Mazzilli and Grant McCool)