TORONTO, Sept 2 (Reuters) - The Canadian dollar rebounded from nearly a three-week low against its U.S. counterpart on Wednesday as investors raised bets on a Bank of Canada interest rate hike this year after the central bank said upside risks to inflation have increased.
The loonie was trading 0.2% higher at 1.3870 per U.S. dollar, or 72.10 U.S. cents, after touching its weakest intraday level since August 13 at 1.3939.
The Bank of Canada kept its key policy rate on hold at 2.25%, as widely expected, but said the ongoing Middle East conflict has raised upside risks to its inflation forecast while new U.S. tariffs have made growth prospects more uncertain.
"The market seems to be putting more weight on the inflation concerns than on the lack of confidence over growth prospects," Avery Shenfeld, chief economist at CIBC Capital Markets, said in a note.
Investors see a roughly 75% chance of a BoC interest rate hike this year, up from 64% before the policy announcement.
Canadian trade and employment data, due on Thursday and Friday, respectively, can offer further clues on the outlook for the domestic economy.
The price of oil, one of Canada's major exports, held near one-month highs as traders weighed the risk of supply disruptions after overnight strikes by the U.S. and Iran. U.S. crude oil futures were trading 0.3% higher at $90.46 a barrel.
Canadian government bond yields moved higher across the curve. The 2-year was up 3.9 basis points at 3.058%, approaching the top of its range since March.
The gap between the 2-year yield and the U.S. equivalent narrowed by 4.1 basis points to about 133 basis points in favor of the U.S. note, reversing some recent widening in the gap.
Reporting by Fergal Smith; Editing by Paul Simao
