Canadian dollar hits 4-week low as election jitters mount

By Fergal Smith

TORONTO (Reuters) - The Canadian dollar weakened against its U.S. counterpart on Friday as commodity prices fell and investors adjusted their positions ahead of a Canadian federal election, with the currency losing ground for a second week.

The Canadian dollar was trading 0.5% lower at 1.2746 to the greenback, or 78.46 U.S. cents, after touching its weakest level since Aug. 23 at 1.2762. For the week, the currency was down 0.4%, adding to its decline from the prior week.

"It may just be a little bit of position-readying for the election outcome on Monday," said Amo Sahota, director at Klarity FX in San Francisco. "It is a slightly tighter race than I think Trudeau would definitely have wanted."

Foreign investors are growing more worried that Canada's election on Monday could result in a deadlock that hampers Ottawa's response to the COVID-19 pandemic and further slows the economic recovery from the crisis.

Polls show Prime Minister Justin Trudeau's center-left Liberals virtually tied with the opposition Conservatives.

Declines for equity and commodity markets added to pressure on the loonie, Sahota said.

"It's a little bit of a reality check coming into the marketplace, readying for the FOMC, readying for the election on Monday, reacting to the metal prices."

World shares fell, pressured by concerns over China's markets, the potential for a U.S. corporate tax hike and an update on the U.S. Federal Reserve's tapering strategy next week.

Oil, one of Canada's major exports, settled 0.9% lower at $71.97 a barrel, while copper was down 0.7%.

Canadian government bond yields were higher across a steeper curve, tracking the move in U.S. Treasuries.

The 10-year touched its highest level since July 15 at 1.300% before dipping slightly to 1.293%, up 5.7 basis points on the day.

(Reporting by Fergal Smith in Toronto; Editing by Jane Merriman and Matthew Lewis)