Canadian dollar hits 1-week low as equity market volatility jumps

By Fergal Smith

TORONTO (Reuters) - The Canadian dollar weakened to a one-week low against its U.S. counterpart on Monday, with equity market volatility triggering demand for the greenback as investors became jittery about prospects for U.S. fiscal stimulus.

The loonie was trading 0.1% lower at 1.2750 to the greenback, or 78.43 U.S. cents, having touched its weakest level since last Monday at 1.2779.

U.S. stocks pulled back from early highs as concerns over the timing and size of fiscal stimulus curbed optimism about the start of a week of earning reports from mega-cap companies.

The VIX, which measures the market's expectations for volatility, jumped by more than 10%, while the safe-haven U.S. dollar advanced against a basket of major currencies.

"I think we are seeing the roots of a broad-based counter-trend rally in the USD starting to take shape," said Tony Valente, a senior FX dealer at AscendantFX.

U.S. crude prices settled nearly 1% higher at $52.77, but gains were capped by worries that renewed lockdowns will crimp demand. Oil is one of Canada's major exports, of which about 75% go to the United States.

Canada is worried by U.S. President Joe Biden's plans for a "Buy American" program to boost domestic industry and it will be a priority for talks with the new administration, Finance Minister Chrystia Freeland said.

Canadian government bond yields were lower across a flatter curve in sympathy with U.S. Treasuries. The 10-year eased 3.3 basis points to 0.813%, extending a pullback from a 10-month high on Thursday at 0.892%.

Canada's GDP data for November is due on Friday, which could help guide Bank of Canada interest rate expectations.

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