Canadian dollar rises as investors weigh Fed rate outlook

By Fergal Smith

TORONTO (Reuters) - The Canadian dollar edged higher against its U.S. counterpart on Monday as oil prices rose and investors bet that the Federal Reserve would not raise interest rates at a meeting this week.

The loonie was trading 0.2% higher at 1.3565 to the greenback, or 73.72 U.S. cents, after moving in a range of 1.3551 to 1.3604.

Financial markets were subdued ahead of U.S. consumer price index data due on Tuesday and the Fed on Wednesday, both of which will test investor optimism about interest rates easing next year.

"Economists are expecting the Fed to keep rates on hold and (then) in early to mid 2024 start to cut interest rates," Darren Richardson, chief operating officer at Richardson International Currency Exchange, said in a note. "Lower (interest) rates typically increase risk appetite and create a weaker USD."

Canada is a major producer of commodities, including oil, so the loonie tends to be sensitive to shifts in risk appetite.

The price of oil rose but persistent worries around crude oversupply heading into next year remain. U.S. crude prices were up 0.4% at $71.54 a barrel.

Speculators have cut their bearish bets on the Canadian dollar, data from the U.S. Commodity Futures Trading Commission showed on Friday. As of Dec. 5, net long positions had decreased to 57,848 contracts from 63,242 in the prior week.

Canadian government bond yields increased across the curve. The 10-year was up 5.1 basis points at 3.426%, extending its rebound from a five-month low last Wednesday at 3.264%.

The gap between the Canadian 10-year yield and its U.S. equivalent narrowed by 4.7 basis points to 82.8 basis points in favor of the U.S. note.

(Reporting by Fergal Smith; Editing by Lisa Shumaker)