TORONTO, April 14 (Reuters) - The Canadian dollar strengthened to a three-week high against its U.S. counterpart on Tuesday as optimism about a diplomatic solution to the conflict in the Middle East boosted equity markets and weighed on the greenback.
The loonie was trading 0.2% higher at 1.3760 per U.S. dollar, or 72.67 U.S. cents, after touching its strongest intraday level since March 24 at 1.3732.
Negotiators from the U.S. and Iran could return to Islamabad this week to resume talks to end the war, sources told Reuters.
"The market is in an upbeat mood," said Amo Sahota, director at Klarity FX in San Francisco. "Traders are optimistic that a diplomatic off-ramp can be engineered, leading to a slow build into risk-on positions."
Wall Street stocks rose and the safe-haven U.S. dollar (.DXY), declined for a seventh straight day against a basket of major currencies.
The price of oil was down 6.9% at $92.25 a barrel. Oil is one of Canada's major exports but its recent surge has raised the outlook for inflation globally.
"Overall, it will take something more concrete on the US-Iran front to pull the loonie back towards the year lows (for USD-CAD) nearer 1.35," Sahota said. "Still, a return towards 1.37 is a helpful reprieve for now."
Canadian Prime Minister Mark Carney secured a parliamentary majority for his Liberal government on Monday, a win that he has said will help him deal more effectively with the U.S.-led trade war.
The United States-Mexico-Canada Agreement, which has shielded much of Canada's exports from U.S. tariffs, is set for review in the coming months.
Canadian bond yields moved lower across the curve, tracking moves in U.S. Treasuries, after the release of U.S. data that showed producer prices increased less than expected in March. The 10-year was down 1.9 basis points at 3.448%.
Reporting by Fergal Smith; Editing by Alistair Bell
