Canadian dollar weaker as rate outlook diverges

By Alastair Sharp TORONTO (Reuters) - The Canadian dollar weakened against its U.S. counterpart on Tuesday as the greenback made broad-based gains, with domestic equities underperforming and investors eyeing a Federal Reserve interest rate hike by the end of the year. While tighter Canadian housing rules announced on Monday could lower barriers to a near-term Bank of Canada rate cut, most economists expect domestic rates to be stuck on hold. "I think the Bank of Canada would rather see a C$1.35 dollar/Canada than have to cut," said Darcy Browne, managing director of foreign exchange sales at CIBC Capital Markets. The Canadian dollar ended the day trading at C$1.3194 to the greenback, or 75.79 U.S. cents, weaker than Monday's close of $1.3110, or 76.28 U.S. cents. Canada's main stock index fell 1.1 percent, compared to losses of between 0.2 percent and 0.5 percent for Wall Street. [.TO][.N] The spread between Canadian and U.S. 10-year yields widened by 1.4 basis points to 62.2 basis points, its widest since March. Browne said that a weaker-than-expected jobs report on Friday could definitively push the loonie past its 200-day moving average of C$1.3221. The currency's strongest level of the session was C$1.3114, while its weakest was C$1.3215. The currency of Canada, a major oil exporter, has failed to get much of a lift from a recent gain in crude prices to a four-month high as OPEC plans output cuts. "In the short term right now, rates are a bigger driver, unless we have a big move over $50 (a barrel)," Browne said. Crude prices settled slightly lower, with U.S. crude down 12 cents at $48.69 a barrel and Brent off 2 cents at $50.87. [O/R] The U.S. dollar <.DXY> rose against a basket of major currencies as investors raised bets on a U.S. interest rate hike by the end of the year. Canadian auto sales were down 0.5 percent in September from the prior month, with a sharp fall in passenger car sales offset by higher light truck sales, industry analyst Dennis DesRosiers wrote on Monday. Canadian government bond prices were lower across the yield curve, with the two-year down 2.5 Canadian cents to yield 0.552 percent and the benchmark 10-year falling 48 Canadian cents to yield 1.067 percent. Canada's international merchandise trade report for August is due on Wednesday, and investors will be looking to see if exports were as strong as in the previous month. The September employment report is due on Friday. (Additional reporting by Fergal Smith; Editing by Chris Reese and James Dalgleish)