By Fergal Smith
TORONTO (Reuters) - The Canadian dollar strengthened against its U.S. counterpart on Wednesday as the Bank of England's move to support the bond market wrong-footed some investors, with the currency pulling back from its weakest level in more than two years.
Wall Street rebounded strongly following its recent sell-off, while U.S. Treasury yields tumbled and the U.S. dollar lost ground against a basket of major currencies after the BoE said it would buy long-dated British bonds in a move aimed at restoring financial stability.
Markets have been rocked globally by the fiscal policy of the new government in London.
"This Bank of England move caught everybody off guard," said Erik Bregar, director, FX & precious metals risk management at Silver Gold Bull. "Because there is lots of broad dollar selling, it's benefiting the Canadian (currency)."
The Canadian dollar was trading 0.7% higher at 1.3625 to the greenback, or 73.39 U.S. cents, after earlier touching its weakest level since May 2020 at 1.3832.
"There is still a lot of people short bonds, short equities, long the (U.S.) dollar - all the trades that were working very well up until today," Bregar said.
"I wouldn't be surprised after some consolidation overnight that what we're seeing today continues into the end of the week."
Adding to support for the loonie, the price of oil settled 4.7% higher at $82.15 a barrel as U.S. fuel inventory figures showed larger-than-expected drawdowns and a rebound in consumer demand. Oil is one of Canada's major exports.
The Bank of Canada said it would begin publishing a summary of its monetary policy deliberations starting next year, accepting a key recommendation from a transparency review by the International Monetary Fund.
The Canadian 10-year yield tumbled 26 basis points to 3.06%, after earlier touching its highest since June 28 at 3.368%.
(Reporting by Fergal Smith, editing by Nick Zieminski and Marguerita Choy)