TORONTO, Oct 29 (Reuters) - The Canadian dollar strengthened to a six-week high against its US counterpart on Thursday after the start of a Bank of Canada tightening cycle helped narrow the gap between Canadian and US bond yields.
The loonie was trading 0.1% higher at 1.3982 per US dollar, or 71.52 US cents, after touching its strongest intraday level since September 16 at 1.3966.
The gap between Canada's 2-year yield and the US equivalent narrowed by 4.7 basis points to about 128 basis points in favor of the US note. It was as much as 160 basis points earlier this month, the widest gap since February 2025.
On Wednesday, the Bank of Canada hiked its key interest rate by 25 basis points to 2.50% and said further increases might be needed to prevent soaring energy costs from driving broader inflation, while the Federal Reserve left its policy rate on hold.
The yield spread move was "giving traders conviction to chase further gains for the loonie," said Amo Sahota, director at Klarity FX in San Francisco.
"Oil prices are also remaining elevated, lending some support to the currency," Sahota said.
U.S. crude oil futures settled 0.8% lower on hopes for peace talks between the US and Iran but remained elevated at $102 a barrel. Oil is one of Canada's major exports.
The US dollar fell against a basket of major currencies as US Treasury yields eased after the release of US inflation data that was mostly in line with expectations.
The Canadian 10-year yield was down half a basis point at 3.853%.
Ontario, one of the world's largest sub-sovereign borrowers, forecast a wider budget deficit than previously expected and a delayed return to balance as it provides tax relief for businesses and support for sectors hit hard by US tariffs, a fiscal update showed.
Reporting by Fergal Smith, Editing by Nick Zieminski
