CANADA FX DEBT-Canadian dollar hits 3-week low as yield advantage crumbles

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(Adds dealer quotes and details throughout; updates prices) * Canadian dollar falls 0.6% against the greenback * Touches weakest level since Jan. 6 at 1.2747 * Price of U.S. oil settles 0.9% lower * Canadian bond yields ease across flatter curve By Fergal Smith TORONTO, Jan 27 (Reuters) - The Canadian dollar weakened to a three-week low against its U.S. counterpart on Thursday, as bets on faster interest rate hikes by the Federal Reserve bolstered the greenback against a basket of major currencies. The U.S. dollar busted out of its recent range a day after the Fed flagged it was ready to start lifting rates in March to contain inflation. Money markets have moved to price in as many as five quarter-percentage-point U.S. rate increases by the end of the year. "It is hard for the Canadian dollar to swim upstream," said Michael Goshko, corporate risk manager at Western Union Business Solutions. You are seeing "the (yield) premium that Canada had fall significantly. Those are things that would hurt the Canadian dollar," Goshko added. The gap between Canada's 2-year yield and its U.S. equivalent tumbled by 9.6 basis points to 9.4 basis points in favor of the Canadian bond. That was the smallest gap since April 2021. The Canadian dollar was trading 0.6% lower at 1.2745 to the greenback, or 78.52 U.S. cents, after touching its weakest level since Jan. 6 at 1.2747. The Bank of Canada is also expected to begin hiking rates in March. On Wednesday, it surprised some investors by leaving its benchmark interest rate on hold at 0.25%. The central bank's decision to delay a hike will add fuel to Canada's scorching housing market as buyers scramble to clinch deals before borrowing costs rise, realtors said. The price of oil, one of Canada's major exports, pulled back from seven-year highs as the prospect of U.S. rate hikes offset concerns about tight worldwide supply. U.S. crude futures settled 0.9% lower at $86.61 a barrel. Canadian government bond yields were lower across a flatter curve, with the 10-year down 6 basis points at 1.780%. (Reporting by Fergal Smith Editing by Paul Simao and Jonathan Oatis)

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