By Fergal Smith
TORONTO (Reuters) - The Canadian dollar fell against the greenback on Tuesday, giving up much of the prior day's rally, as the Federal Reserve cut interest rates in an emergency move that investors see the Bank of Canada matching at a policy decision on Wednesday.
At 2:50 p.m. (1950 GMT), the Canadian dollar was trading 0.4% lower at 1.3371 to the greenback, or 74.79 U.S. cents. The currency, which on Friday hit its weakest intraday level in nearly nine months at 1.3465, traded in a range of 1.3319 to 1.3387.
The U.S. central bank said it was cutting rates by a half percentage point to a target range of 1.00% to 1.25% as the "coronavirus poses evolving risks to economic activity."
The Bank of Canada had been expected by investors to cut its benchmark interest rate, which sits at 1.75%, by 25 basis points on Wednesday. Money markets quickly shifted gear to price in a 50 basis points move.
It would be the first 50 basis points cut by the central bank since March 2009.
"Twenty-five basis points may prompt loonie strength and derail the stimulus of the cut itself, while 50 basis points could stoke a housing bubble," said Simon Harvey, FX market analyst for Monex Europe and Monex Canada.
"Markets are running with the fact that the latter is a less concerning risk at the moment and are aggressively pricing a similar 50 bps from the BoC," Harvey said.
Canada is a major exporter of commodities, including oil, so a slowdown in the global economy due to the coronavirus outbreak could hurt.
The Canadian government is open to the idea of helping firms that are suffering from financial damage due to the outbreak of a novel coronavirus, Prime Minister Justin Trudeau said, without providing details.
U.S. crude oil futures (CLc1) settled 0.9% higher at $47.18 a barrel but shares on Wall Street lost ground in volatile trade as investors worried that the Fed cut might not be enough to shield the world's largest economy from the impact of the coronavirus epidemic.
Canadian government bond yields tumbled across a steeper yield curve in sympathy with U.S. Treasuries. The 10-year yield (CA10YT=RR) was down 14.9 basis points at 0.953%, its lowest level since October 2016.