Canadian dollar hits two-week high as investors weigh U.S. policy uncertainty

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Canadian dollar gains 0.4% against the greenback

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Touches its strongest since January 6 at 1.37835

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Price of oil falls 2.2%

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Bond yields edge lower across flatter curve

By Fergal Smith

TORONTO, Jan 22 (Reuters) - The Canadian dollar strengthened to a two-week high against its U.S. counterpart on Thursday as investors weighed the prospect of continued U.S. policy uncertainty and bet that fiscal spending will help support Canada's economy this year.

The loonie was trading 0.4% higher at 1.37835 per U.S. dollar, or 72.55 U.S. cents, its strongest intraday level since January 6.

The U.S. dollar fell against a basket of major currencies after the release of U.S. inflation data that was in line with market expectations. It had notched gains the day before as President Donald Trump dropped tariff threats and ruled out seizing Greenland by force.

"We continue to think risks for USD-CAD skew to the downside as U.S. policy uncertainty persists and the loonie benefits from comparatively solid (Canadian) fundamentals," said Nick Rees, head of macro research at Monex Europe Ltd.

"Labour market data continues to print stronger than expected, while inflation remains above target with underlying price pressures elevated too," Rees said. "Looking ahead, we are constructive on the federal budget announced late last year, which we think will provide a tailwind to activity in 2026, as should the lagged effects of policy loosening."

The Bank of Canada has signaled a potential end to its easing cycle after the benchmark interest rate was lowered by 2.75 percentage points since June 2024. Investors are betting that the rate will be left unchanged at 2.25% next week and through the rest of 2026.

Canadian Prime Minister Mark Carney has committed to investing billions of dollars on infrastructure and measures to raise productivity. Renewed verbal attacks from Trump are prompting Canadians to rally behind Carney.

The price of oil, one of Canada's major exports, fell 2.2% to $59.26 a barrel as investors assessed the supply-demand outlook.

Canadian bond yields edged lower across a flatter curve, with the 10-year down 2 basis points at 3.396%. (Reporting by Fergal Smith; Editing by Alistair Bell)