TORONTO, April 16 (Reuters) - The Canadian dollar strengthened to a three-week high against its safe-haven U.S. counterpart on Thursday as hopes rose of a diplomatic solution to end the war in the Middle East.
The loonie was trading 0.3% higher at 1.3703 per U.S. dollar, or 72.98 U.S. cents, marking its strongest level since March 23.
U.S. President Donald Trump said Israel and Lebanon had agreed to a 10-day ceasefire, potentially removing a key obstacle to a broader peace agreement in the region.
"Currency markets have been swept up in a big risk-off, risk-on shift since the Iran war began," said Mirza Baig, a foreign exchange strategist at Desjardins.
"The U.S. dollar benefited disproportionately from a flight to quality in March but gave back these gains once risk appetite improved."
The greenback (.DXY), edged higher against a basket of major currencies but had previously fallen for eight straight days, while stocks on Wall Street rose to intraday record highs.
The price of oil was up 2.4% at $93.52 a barrel. Canada is a major producer of oil and other energy products.
European buyers are exploring the possibility of purchasing liquefied natural gas from Canada's Pacific coast and shipping it through the Panama Canal as part of a long-term strategy to diversify supply.
"Looking forward, we are looking at central bank policies and (the) upcoming announcement on CUSMA to drive the Canadian dollar," Baig said.
The Canada-United States-Mexico Agreement, also known as USMCA, which has shielded much of Canada's exports from U.S. tariffs, is set for review in the coming months.
Investors expect the Bank of Canada to leave its benchmark interest rate on hold at 2.25% at its next policy decision on April 29 but are pricing in one rate hike by the end of the year.
Domestic data showed that home sales edged 0.1% lower in March from February and prices declined.
The Canadian 10-year yield was trading 2.8 basis points higher at 3.502%.
Reporting by Fergal Smith; Editing by Kirsten Donovan
