Canada's Economy: Canadian dollar drops to six-day low amid U.S. inflation fears

                                                

The Canadian dollar fell to its lowest level in six days on Wednesday, as investors were rattled by higher-than-expected U.S. inflation data that raised the prospect of tighter monetary policy south of the border.

The loonie traded at 79.32 U.S. cents, down 0.6% from Tuesday's close, after touching a low of 79.25 earlier in the session.

The U.S. consumer price index jumped 0.9% in June from May, the largest monthly increase since June 2008, and rose 5.4% on a year-over-year basis, the highest annual rate since August 2008.

The data fueled fears that the U.S. Federal Reserve may have to start tapering its bond-buying program and raising interest rates sooner than expected, which could boost the U.S. dollar and weigh on riskier currencies like the loonie.

"The market is clearly concerned that the Fed is behind the curve and will have to act more aggressively than previously anticipated," said Colin Cieszynski, chief market strategist at SIA Wealth Management.

He added that the loonie was also pressured by a decline in oil prices, as the Organization of the Petroleum Exporting Countries and its allies (OPEC+) agreed to increase output from August, easing supply concerns.

Brent crude, the global benchmark, fell 2.3% to $74.76 a barrel, while West Texas Intermediate (WTI) dropped 2.8% to $73.13.

Cieszynski said the loonie could find some support from the Bank of Canada's policy decision on Wednesday, which is expected to maintain its current pace of bond purchases and keep its benchmark interest rate at 0.25%.

"The Bank of Canada has been more hawkish than the Fed, so that could provide some relief for the loonie," he said.

However, he noted that the bank may also express some caution about the outlook for the Canadian economy, given the recent surge in COVID-19 cases and the uncertainty over the reopening plans of some provinces.