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TORONTO: The Canadian dollar strengthened to a nearly one-week high against its US counterpart on Monday as rising expectations of a Federal Reserve interest rate cut this year weighed on the greenback.

The US dollar tumbled against a basket of major currencies after St. Louis Federal Reserve President James Bullard said an interest rate cut "may be warranted soon," given the rising economic risk posed by global trade tensions as well as weak US inflation.

"It's a broader move on the US dollar following these comments," said Simon Côté, managing director, risk management solutions at National Bank Financial. "The market is getting what it was waiting for, a reason to take some profit, sell some (US) dollars."

The gap between Canada's 2-year yield and its US equivalent narrowed by 4.2 basis points to a spread of 47.2 basis points in favor of the US bond, its narrowest gap since April 2018.

The narrower spread comes after the Bank of Canada said last week there was increasing evidence that a slowdown in the domestic economy was temporary, as it left its benchmark interest rate unchanged at 1.75%.

"I think the Bank of Canada will be in more of a wait and see mood instead of aggressively cutting rates to follow the Fed," Côté said.

The downturn in Canada's manufacturing sector deepened in May as the depressed state of global trade led to a further decline in production.

At 4:07 p.m. (2007 GMT), the Canadian dollar was trading 0.6% higher at 1.3441 to the greenback, or 74.40 US cents. The currency, which fell in May for the fourth straight month, touched its strongest level since last Tuesday at 1.3435.

The price of oil, one of Canada's major exports, fell as US trade disputes with Mexico and China deepened concerns about weakening global crude demand. US crude oil futures settled 0.5% lower at $53.25 a barrel.

Mexico and Canada said on Friday they would proceed with plans to ratify a new continental trade pact despite a threat from U.S. President Donald Trump to impose tariffs on Mexico unless a surge of illegal immigrants ceased.

Canadian government bond prices were higher across the yield curve on Monday in sympathy with US Treasuries. The two-year rose 11.5 Canadian cents to yield 1.368% and the 10-year gained 61 Canadian cents to yield 1.425%.

The 10-year yield hit its lowest since June 2017 at 1.423%.

Copyright Reuters, 2019