Canadian dollar pares gains as Ukraine tensions climb

© Reuters. FILE PHOTO: A Canadian dollar coin, commonly known as the "Loonie", is pictured in this illustration picture taken in Toronto, January 23, 2015. REUTERS/Mark Blinch (CANADA - Tags: BUSINESS)/File Photo

By Fergal Smith

TORONTO (Reuters) - The Canadian dollar strengthened against its U.S. counterpart on Wednesday but gave up much of its advance as rising Russia-Ukraine tensions weighed on investor sentiment.

The loonie was up 0.2% at 1.2740 to the greenback, or 78.49 U.S. cents, after earlier touching its strongest level since last Friday at 1.2683.

"Recent trading has made it clear that the broader risk mood is the essential driver for the CAD at the moment," strategists at Scotiabank (TSX:BNS), including Shaun Osborne, said in a note.

U.S. stocks were sharply lower and the safe-haven U.S. dollar gained ground against a basket of major currencies as Ukraine declared a state of emergency and the West unveiled more sanctions against Russia over its move into eastern Ukraine.

Sanctions were not yet expected to disrupt oil supplies, helping to cap the price of oil, one of Canada's major exports, after it notched a seven-year high on Tuesday. U.S. crude prices settled 0.2% lower at $92.10 a barrel.

Other commodity-linked currencies also gained ground, including a 5-week high for the New Zealand dollar as the country's central bank hiked interest rates as expected and signaled a more aggressive path forward than even the most hawkish investor had wagered.

The Bank of Canada is expected to hike next Wednesday for the first time since October 2018.

Canadian government bond yields were higher across the curve, tracking the move in U.S. Treasuries. The 10-year rose 5.1 basis points to 1.977%, approaching last Wednesday's three-year high at 1.995%.