TORONTO, April 27 (Reuters) - The Canadian dollar strengthened to nearly a seven-week high against its U.S. counterpart on Monday, as investors remained optimistic about a diplomatic solution to end the war in the Middle East and awaited policy decisions this week from some major central banks, including the Bank of Canada.
The loonie was trading 0.4% higher at 1.3615 per U.S. dollar, or 73.45 U.S. cents, after touching its strongest intraday level since March 12 at 1.3598.
Work has not halted to bridge gaps between the U.S. and Iran, said sources from Pakistan, which is acting as the mediator between the two sides.
"De-escalation hopes and a positive risk environment have pushed the pair (USD-CAD) lower," said Sarah Ying, head of foreign exchange strategy at CIBC Capital Markets.
"Oil prices at elevated levels also have benefited commodity currencies, including CAD, especially as geopolitical risks remain contained for now."
The price of oil , one of Canada's major exports, rose 2% to $96.29 a barrel as shipments through the Strait of Hormuz remained limited, keeping global oil supplies tight.
The Bank of Canada is expected to keep its benchmark interest rate on hold at 2.25% on Wednesday as the oil price surge from the war is a temporary shock unlikely to have a lasting impact on inflation expectations, economists said. Steady policy is also expected from the Federal Reserve on Wednesday.
"We are looking for a break (of the 1.36 level) towards the mid-1.35s by the end of the week. We are expecting a more dovish-leaning Fed, versus a more neutral BoC meeting," Ying said.
Speculators have cut their bearish bets on the Canadian dollar, data from the U.S. Commodity Futures Trading Commission showed on Friday. Non-commercial net-short positions stood at 58,834 contracts as of April 21, down from 78,272 in the prior week.
A government fiscal update, due on Tuesday, also could be a focus for investors. Canada will set up a sovereign wealth fund with an initial endowment of C$25 billion ($18.38 billion) to invest in major domestic projects, Prime Minister Mark Carney told reporters on Monday.
The Canadian 10-year yield was up 3.6 basis points at 3.499%.
Reporting by Fergal Smith; Editing by Paul Simao
