Canadian dollar notches biggest gain in four months as investor optimism rises

TORONTO (Reuters) - The Canadian dollar rallied to a two-week high against its broadly weaker U.S. counterpart on Friday as oil prices rose and a deal to end the U.S. government shutdown helped boost stocks.

U.S. President Donald Trump said he and lawmakers agreed to advance a three-week stop-gap spending plan to reopen the government. This helped boost investor sentiment, which faltered in recent days in the face of revived jitters related to the shutdown and the prolonged U.S.-China tariff spat.

Canada runs a current account deficit and exports many commodities, including oil, so its economy could benefit from an improved outlook for the global flow of trade or capital.

"It is a risk-on day," said Michael Greenberg, portfolio manager for Franklin Templeton Multi-Asset Solutions. "Equity markets are up, yields are higher, credit spreads are tightening, so that tends to be a good environment for the CAD as well."

The price of oil, one of Canada's major exports, rose as political turmoil in Venezuela threatened to tighten crude supply. U.S. crude oil futures settled 1.1 percent higher at $53.69 a barrel.

At 4:09 p.m. (2109 GMT), the Canadian dollar was trading 1 percent higher at 1.3221 to the greenback, or 75.64 U.S. cents, which was its biggest gain since September. The currency touched its strongest level since Jan. 11 at 1.3218.

For the week, the loonie rose 0.3 percent despite weak domestic data that prompted some economists to project that Canada's economy contracted in November.

Chances of another Bank of Canada interest rate hike by the summer have fallen to about 30 percent from more than 50 percent at the end of last week.

The U.S. dollar fell to a 10-day low against a basket of currencies as traders' focus shifted to the Federal Reserve's policy meeting next week.

"We still do think that the Bank of Canada and the Fed will likely have the opportunity to raise rates a little bit this year but probably less than they thought they could three months ago," Greenberg said.

Canadian government bond prices were lower across a steeper yield curve, with the two-year down 4 Canadian cents to yield 1.883 percent and the 10-year falling 38 Canadian cents to yield 1.976 percent.

The gap between Canada's 2-year yield and its U.S. equivalent widened by 2.6 basis points to a spread of 72.5 basis points in favor of the U.S. bond, its widest gap since Dec. 20.

(Reporting by Fergal Smith; Editing by Paul Simao and Marguerita Choy)

By Fergal Smith