Canadian dollar drops to 14-month low on US lumber duties

The Canadian dollar notched its weakest close this year, settling at US73.72¢, compared to Monday's close of US73.99¢. The currency touched its weakest since February 25, 2016 during the session; it's now 1.1 per cent lower on the year.

Against the Australian dollar, the loonie slipped to 97.78 Australian cents. The Canadian dollar has shed 5.3 per cent against its Aussie counterpart so far this year.

"The Canadian dollar has definitely not reacted well to the beating of the trade drums," said Brad Schruder, director of corporate sales and structuring at BMO Capital Markets. While he said reaction to the lumber tariff was likely overdone, the weakness also partly reflected "fear of a snowball effect".

"It renews this concern that Canada could be facing some stiff headwinds on trade negotiations," Schruder also said, after being lulled into a false sense of security from more favourable signals in recent months.

Oil pares gains on API data

Recent weakening in the price of oil, one of Canada's major exports, has added to pressure on the nation's currency amid doubts about the Organisation of the Petroleum Exporting Countries' ability to reduce global crude inventories.

Oil pared its earlier advance in post-settlement trade overnight after after the latest American Petroleum Institute data showed an unexpected increase in US crude inventories. Prices had edged up in volatile trading overnight, rebounding from six days of losses.

US crude futures settled up 33 cents to $US49.56 a barrel, breaking a streak that saw the benchmark lose 7.4 per cent. Brent crude settled up 50 cents at $US52.10 a barrel.

With global oil supplies hovering near record highs, Stephen Schork of the Schork Report said overnight that "OPEC has failed miserably in its endeavour to balance the oil market".

On Tuesday, the Interfax news agency quoted Russian deputy prime minister Arkady Dvokovich as saying Russia may increase oil production if it feels prices are unlikely to fall as a result.

Matt Smith, director of commodity research at ClipperData in Louisville, Kentucky said global crude loadings are at record levels and the outlook is unclear.

"We still see that continue to tick higher," Smith said. "Until we see the loadings drop, until we see the oil on the water falling, we are unlikely to see the market materially moving toward rebalancing."

Canadian government bond prices were lower across the yield curve in sympathy with US Treasuries. The two-year fell 3.5 Canadian cents to yield 0.757 per cent, and the 10-year declined 28 Canadian cents to yield 1.521 per cent. Canadian retail sales data for February is due on Wednesday.

Euro rises v $US

Elsewhere in currency markets, the euro hit $US1.0950, its highest level against the US dollar in five and a half months, as traders digested centrist candidate Emmanuel Macron's victory in the first round of France's presidential election on Sunday.

"What we're seeing is the beginning of a longer march" higher in the euro in response to Macron's first-round victory, said Shahab Jalinoos, global head of FX strategy at Credit Suisse in New York.

In addition, three sources on and close to the ECB's Governing Council told Reuters that with the fading of the threat of a run-off between two eurosceptic candidates in France, and with the economy on its best run in years, many rate setters see scope for sending a small signal in June towards reducing monetary stimulus.

Harajli of Mizuho said more hawkish ECB policy would drive interest rates higher in Europe, which would likely boost the euro.

The US dollar surged about 1.3 per cent against the safe-haven yen to a 15-day high of 111.18 yen. The reduced French election concerns, combined with strong new US home sales data and optimism surrounding an expected tax reform announcement from Trump's administration on Wednesday (Thursday AEST) boosted the greenback against the yen.

"If tomorrow's tax plan is seen as credible by the market, then dollar/yen could go higher," Jalinoos of Credit Suisse said.

The dollar index, which measures the US currency against a basket of six major rivals, was last down 0.3 per cent at 98.844 after touching its lowest level in five and a half months, of 98.695.

Reuters