By Fergal Smith
TORONTO (Reuters) - The Canadian dollar slumped to a two-year low against its U.S. counterpart on Wednesday before paring its decline, as investors weighed the Federal Reserve's plans to continue raising interest rates to tackle inflation.
The Canadian dollar was trading 0.3% lower at 1.34 to the greenback, or 74.63 U.S. cents, after touching its weakest since August 2020 at 1.3445.
"The Fed didn't shock anyone by hiking rates 75 bps (basis points), but did prove more hawkish in forecasting a higher terminal rate than markets were anticipating," said Royce Mendes, managing director and head of macro strategy at Desjardins.
The U.S. dollar extended recent gains against a basket of major currencies as the Fed raised its target interest rate by three-quarters of a percentage point to a range of 3.00% to 3.25%.
The central bank signaled more large increases to come in new projections showing its policy rate rising to 4.40% by the end of this year before topping out at 4.60% in 2023 to battle continued strong inflation.
The price of oil, one of Canada's major exports, settled 1.2% lower at $82.94 a barrel as the Fed's hawkish signal offset concerns of tighter oil and gas supply after an escalation of the war in Ukraine.
The Bank of Canada has also been fighting inflation. On Tuesday, Deputy Governor Paul Beaudry said that inflation in Canada remains "too high" but is headed in the right direction, adding that the central bank will do whatever is needed to bring price increases back to target.
Canadian government bond yields were lower across the curve, tracking the move in U.S. Treasuries. The 10-year touched its lowest since Aug. 30 at 3.027%, before recovering to 3.050%, down 5.7 basis points on the day.
(Reporting by Fergal Smith; Editing by Kirsten Donovan and Jonathan Oatis)