Canadian dollar gains as data shows economy 'humming along'

By Fergal Smith

TORONTO (Reuters) - The Canadian dollar strengthened against its U.S. counterpart on Thursday, clawing back some recent declines, as faster-than-expected growth in the domestic economy reduced pressure on the Bank of Canada to cut interest rates in the coming months.

The loonie was trading 0.2% higher at 1.3535 to the U.S. dollar, or 73.88 U.S. cents after trading in a range of 1.3526 to 1.3613. Last Friday, it touched a three-month low at 1.3614.

Canada's gross domestic product increased 0.6% in January from December, its fastest growth rate in a year, led by a bounce back in education services as public sector strikes ended in Quebec. A preliminary estimate for February showed growth of 0.4%.

"The Canadian economic data that came out this morning was more positive than expected," said Rahim Madhavji, president at Knightsbridge Foreign Exchange. "If the economy is humming along, the Bank of Canada can keep rates higher for longer."

The Canadian central bank has left its benchmark interest rate on hold at a 22-year high of 5% since July. Money markets see a 68% chance the BoC will begin a rate cutting campaign in June, down from 70% before the data.

Adding to support for the loonie, the price of oil, one of Canada's major exports, settled 2.2% higher at $83.17 a barrel as investors weighed prospects of tighter oil supplies.

Canadian government bond yields rose across the curve in a shortened session ahead of the Good Friday market holiday.

The 2-year was up 4.5 basis points at 4.187% after earlier touching its highest level since March 19 at 4.210%.

(Reporting by Fergal Smith)