Canadian dollar strengthens as safe-haven bid eludes the greenback

By Fergal Smith

TORONTO (Reuters) - The Canadian dollar strengthened against its U.S. counterpart on Monday, approaching last week's 14-month high as oil prices rose on Middle East tensions and the greenback lost ground against a basket of major currencies.

At 3:23 p.m. (2023 GMT), the Canadian dollar <CAD=D4> was trading 0.3% higher at 1.2963 to the greenback, or 77.14 U.S. cents. The currency, which last Tuesday notched its strongest intraday level since October 2018 at 1.2952, traded in a range of 1.2960 to 1.2990.

The safe-haven yen <JPY=> and Swiss franc <CHF=> rose against the U.S. dollar <.DXY> on worries about a broader escalation of conflict in the Middle East after the United States killed Iran's most prominent military commander.

"I think the (U.S.) dollar looks quite vulnerable here," said Shaun Osborne, chief currency strategist at Scotiabank. "It is definitely not picking up too much support in a risk-off environment and that may be because the U.S. is at the epicenter of this."

Narrowing differentials between U.S. and Canadian interest rates and higher oil prices have added to support for the Canadian dollar, Osborne said.

U.S. crude oil futures <CLc1> settled 0.4% higher at $63.27 a barrel on worries that tensions in the Middle East could disrupt oil supplies.

Data from Statistics Canada showed that producer prices grew by 0.1% in November from October on higher prices for meat, fish and dairy products, as well as energy and petroleum products.

Canada's trade data for November is due on Tuesday and December jobs data is due on Friday, both of which could help guide expectations for the Bank of Canada interest rate outlook.

The central bank left its benchmark interest rate on hold at 1.75% in 2019 even as some other major central banks, such as the Federal Reserve and the European Central Bank, eased. Bank of Canada Governor Stephen Poloz is due to speak on Thursday.

Canadian government bond prices were lower across a steeper yield curve, with the two-year <CA2YT=RR> down 4.5 Canadian cents to yield 1.637% and the 10-year <CA10YT=RR> falling 45 Canadian cents to yield 1.585%.

The gap between Canada's 10-year yield and its U.S. equivalent narrowed by 3 basis points to a spread of 22.2 basis points in favor of the U.S. bond.

(Reporting by Fergal Smith; Editing by Nick Zieminski and Peter Cooney)