Canadian dollar hovers near three-week high as oil prices rise

© Reuters. A Canadian dollar coin, commonly known as the "Loonie", is pictured in this illustration picture taken in Toronto

By Fergal Smith

TORONTO (Reuters) - The Canadian dollar steadied against its U.S. counterpart on Wednesday while holding near its strongest level in nearly three weeks, as oil prices rose and investors braced for a potential interest rate hike next week from the Bank of Canada.

At 3 p.m. EDT (1900 GMT), the Canadian dollar was trading nearly unchanged at C$1.3142 to the greenback, or 76.09 U.S. cents.

The price of oil, one of Canada's major exports, was driven higher by a threat to supply from an Iranian commander and a drop in U.S. crude inventories for a second week in a row.

U.S. crude oil futures (CLc1) rose 0.3 percent to $74.33 a barrel.

"Right now we have many problems on the oil supply side ... and we may see high prices for a few more months," said Hendrix Vachon, senior economist at Desjardins.

The higher price of oil and an expectation in the market that the Bank of Canada will raise interest rates next week have boosted the loonie, Vachon said.

Money markets see about a 70 percent chance of a rate increase at the July 11 announcement.

Expectations have been raised by hawkish comments last week by Bank of Canada Governor Stephen Poloz and recent domestic data that showed business optimism and stronger-than-expected growth in Canada's economy.

Independence Day celebrations in the United States discouraged traders on Wednesday from taking big positions in major currencies, not least until there is some clarity about where the escalating U.S.-China trade tensions are heading. Washington is due to impose tariffs on Chinese imports at the end of the week.

Canada has its own trade dispute with the United States and is also contending with slow-moving talks to revamp the North American Free Trade Agreement.

Also, reduced Canadian oil supplies after a production problem at the Syncrude oil sands facility in Alberta could hurt the country's economic growth in the third quarter.

Canadian government bond prices were lower across the yield curve, with the two-year (CA2YT=RR) down 2.5 Canadian cents to yield 1.909 percent and the 10-year (CA10YT=RR) falling 17 Canadian cents to yield 2.158 percent.

On Tuesday, the 10-year yield touched its highest intraday level in more than two weeks, at 2.204 percent.

Canada's employment report for June and trade data for May are due out on Friday.