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The Canadian dollar strengthened against its U.S. counterpart on Thursday as higher oil prices offset data showing the trade deficit had widened to a record in March, while investors awaited the U.S. employment report on Friday.

At 4 p.m. EDT), the Canadian dollar was trading 0.2 per cent higher at $1.2858 to the greenback, or 77.77 U.S. cents. The currency traded in a range of $1.2818 to $1.2909.

The loonie has been in a holding pattern after hitting a four-week low on Tuesday at $1.2914.

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Investors may look to buy the loonie in the area around $1.29, said Darren Richardson, chief operating officer at Richardson International Currency Exchange Inc.

“I think we won’t see a break of that (level) due to stronger oil prices and more of a cautious tone from the Fed,” Richardson said.

The price of oil, one of Canada’s major exports, was boosted by OPEC production cuts and the potential for new U.S. sanctions against Iran. U.S. crude oil futures settled 0.7 per cent higher at $68.43 a barrel.

The Federal Reserve on Wednesday held interest rates steady.

Some analysts interpreted its comments on inflation as a signal it may allow price rises beyond its target, a stance that would limit the need for it to embark on a more aggressive path of tightening.

The U.S. dollar dipped as investors took profits from a rally that sent the greenback to its highest levels of the year and awaited payrolls data for April.

Canada’s trade deficit in March widened to a record $4.14 billion, Statistics Canada said.

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But economists said the data was not all bad news for the economy, as exports rose and a surge in imports pointed to strength in domestic demand.

“Some of the investment-related products were up solidly as were some of the consumer products,” said Doug Porter, chief economist at BMO Capital Markets. “It’s not a clear-cut message for the Bank of Canada.”

Chances of an interest rate hike by July were little changed after the data at about 75 per cent, the overnight index swaps market indicated.

Canadian government bond prices were higher across a flatter yield curve, with the 10-year rising 34 cents to yield 2.325 per cent.

The gap between Canada’s 10-year yield and its U.S. counterpart widened by 2.2 bps to a spread of -62.3 basis points.

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