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The Canadian dollar CADUSD strengthened against its U.S. counterpart on Friday as oil prices rose and the market took stock of recent losses for the currency, but the move was limited following the recent move in yield spreads in favour of the greenback.

The loonie was trading 0.1 per cent higher at 1.3750 per U.S. dollar, or 72.73 U.S. cents, after trading in a range of 1.3724 to 1.3804. For the week, the currency was up 0.2 per cent.

Still, it was trading not far from a five-month low that it hit on Tuesday, at 1.3846, following the release of softer-than-expected domestic consumer price index data.

“The Canadian dollar coming back somewhat is simply technical from an oversold market,” said Michael Goshko, senior market analyst at Convera Canada.

The slowdown in Canadian inflation has contrasted with the recent heating up of U.S. price pressures, raising bets the Bank of Canada would begin easing interest rates before the Federal Reserve.

“We saw interest rate spreads between Canada and the U.S. just absolutely widen out,” Goshko said. “That definitely had a negative impact on the Canadian dollar … “It’s going to be hard for Canada to gain much ground.”

The gap between Canada’s 2-year yield and the U.S. equivalent has widened to 73 basis points in favour of the U.S. note from 45 basis points at the start of the month.

The price of oil, one of Canada’s major exports, pared its earlier gains after Iran played down a reported Israeli attacks on its soil, in a sign that an escalation of hostilities in the Middle East might be avoided. Still, U.S. crude oil futures were up 0.7 per cent at $83.27 a barrel.

Canadian bond yields edged lower across the curve. The 10-year eased 1.7 basis points to 3.737 per cent, but was holding near a five-month high it touched on Tuesday at 3.810 per cent.

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