By Fergal Smith
TORONTO (Reuters) - The Canadian dollar fell against its broadly stronger U.S. counterpart on Wednesday as the Bank of Canada surprised some investors by leaving interest rates on hold, offsetting support for the currency from higher oil prices.
The Bank of Canada will soon start hiking interest rates from record lows to combat inflation, Governor Tiff Macklem said, after the central bank left its policy rate at a record low of 0.25%.
Money markets had seen about a 70% chance that the central bank would hike on Wednesday for the first time since October 2018. They now expect lift-off in March.
"The disappointment from the Bank of Canada will quickly fade while the tailwind from oil is significantly growing," said Adam Button, chief currency analyst at ForexLive.
"The open question is how much of the recent rise is fundamental and how much is political."
Rising political tensions between Russia and Ukraine have added to concerns about further disruption in an already-tight market for oil, one of Canada's major exports. U.S. crude oil futures settled 2% higher at $87.35 a barrel.
The Canadian dollar was trading 0.4% lower at 1.2680 to the greenback, or 78.86 U.S. cents, after trading in a range of 1.2560 to 1.2688.
The U.S. dollar rallied against a basket of major currencies and Wall Street gave back its earlier gains as the Federal Reserve signaled that it is likely to raise U.S. interest rates in March and later launch a significant reduction in its asset holdings.
Canadian government bond yields rose across the curve although by much less than U.S. rates. The 10-year was up 2.2 basis points at 1.826%.
Last Wednesday, it touched its highest level in nearly three years at 1.905%.
(Reporting by Fergal Smith; Editing by Bernadette Baum and Sandra Maler)