C$ extends January gains as U.S. wage pressures ease

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Canadian dollar strengthens 0.6% against the greenback

For the month, it was up 1.9%

Canadian economy likely grows 1.6% in fourth quarter

Canada-U.S. 2-year spread narrows by 8.3 basis points

Adds strategist quote and details throughout; updates prices

By Fergal Smith

TORONTO, Jan 31 (Reuters) -The Canadian dollar strengthened against its U.S. counterpart on Tuesday, adding to its gains since the start of the year, as investors cheered U.S. data showing labor costs increasing at a slower pace.

The loonie CAD= was trading 0.6% higher at 1.33 to the greenback, or 75.19 U.S. cents, at near its strongest level in more than two months, which it touched on Monday at 1.3297.

For January, it was up 1.9%, its biggest monthly advance since October 2021, as signs of easing inflation bolstered risk appetite.

U.S. labor costs increased at their slowest pace in a year in the fourth quarter as wage growth slowed, giving the Federal Reserve, which is due to make an interest rate decision on Wednesday, a boost in its fight against inflation.

"It's an encouraging development for the Fed ... that helped to support equity markets," said Mazen Issa, a senior FX strategist at TD Securities. "There is a pretty strong relationship between equity markets currently and FX markets, including the CAD."

Major U.S. stock indexes rose, the U.S. dollar .DXY fell against a basket of major currencies and the price of oil, one of Canada's key exports, settled 1.25% higher at $78.87 a barrel.

The Canadian economy grew 0.1% in November, matching forecasts, while a preliminary estimate showed a flat reading for December and annualized gross domestic product in the fourth quarter was likely up 1.6%, above the Bank of Canada's forecast of 1.3%.

Canadian government bond yields rose across the curve.

The 2-year CA2YT=RR was up 2.9 basis points at 3.774%, while the gap compared to the equivalent U.S. rate narrowed by 8.3 basis points to about 43 basis points in favor of the U.S. bond.

Reporting by Fergal Smith
Editing by Alistair Bell and Will Dunham


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