Dollar slips, hits 3-1/2-month low versus loonie, as eyes turn to Fed

Brent Lewin | Bloomberg | Getty Images

The U.S. dollar fell to its lowest against the Canadian dollar since late February on Tuesday after hawkish comments from Bank of Canada Governor Stephen Poloz.

Poloz said that the central bank's 2015 interest rate cuts "have largely done their work," signaling that the BOC could raise interest rates sooner than previously thought.

Bank of Canada Senior Deputy Governor Carolyn Wilkins said late on Monday that first-quarter growth in Canada had been "pretty impressive," and that signs economic growth was broadening would lead the central bank to consider whether current low rates would still be required.

"It's one of the biggest moves we've seen over the past year" in the Canadian dollar, said Mark McCormick, North American head of FX strategy at TD Securities in Toronto. "That's dragging some of the dollar bloc currencies with it."

Speculators have more than 120,000 short contracts on the Canadian dollar, with net short bets remaining near a record high, according to data from the Commodity Futures Trading Commission and Reuters.

"The market had been overlooking the strengthening economic data from Canada, and obviously now that were starting to see some change in communication from the Bank of Canada to acknowledge that ... the market wont be able to look through that," said MUFG currency economist Lee Hardman, in London.

"The shift to a more hawkish stance will offer the potential for the Canadian dollar to strengthen further from here."

The U.S. dollar, meanwhile, fell 0.13 against a basket of currencies to a five-day low ahead of the start of the Federal Open Market Committee's June policy meeting , as the euro edged higher , staying just above $1.12.

Investors' focus Wednesday will be on the Fed's statement following the meeting and its assessment of the economy and inflation outlook.

"Since the market is widely expecting the Fed to raise interest rates, the foreign exchange market reaction is likely to come more from any signaling with regards to the future path of monetary policy normalization," said Eric Viloria, senior currency strategist at Wells Fargo in New York.

Investors will also be watching for any fresh details on the central bank's plans for trimming its balance sheet.

Sterling regained almost the whole of its losses from Monday, rising 0.77 percent. Both the Japanese yen and Swiss franc were flat.