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OTTAWA, Nov 1 (Reuters) - Bank of Canada Governor Stephen Poloz said on Wednesday that while monetary policy decisions will have an effect on the Canadian dollar, oil prices will have the biggest long-term impact on the currency.
In testimony to lawmakers for a second straight day, Poloz said the Canadian dollar was obviously very strong earlier in the year as expectations for interest rate hikes ramped up, but the currency has drifted lower as economic growth moderates from an unsustainably quick pace.
While there is a very close correspondence between the Canadian dollar and oil prices over the long term, Poloz noted there are periods when gaps appear in that relationship, which can be due to other factors, such as interest rates.
"The interest rate difference between Canada and the United States is an important determinant of the Canadian dollar at any point in time," Poloz said.
"If interest rates are holding constant, then it will be oil prices that do most of the acting. But if oil prices are constant, it tends to be expectations about interest rates that have their biggest influence on the dollar," Poloz said.
The loonie has been the weakest performer of the Group of 10 major currencies in the seven weeks since the bank last raised rates, and some strategists predict more declines in value after the central bank dialed back expectations for more interest rate increases this year.
The Bank of Canada's more dovish tone in recent weeks has tempered bets it will hike again in December and many economists now see the central bank on hold until 2018.
Poloz also reiterated that after two hikes earlier this year, a number of factors will keep the bank cautious on future interest rate moves.
The uncertainty around renegotiations of the North American Free Trade Agreement means companies will hold off to make investment decisions down the road, rather than today, Poloz said. (Reporting by Leah Schnurr and Andrea Hopkins; editing by Diane Craft, G Crosse)