CANADA FX DEBT-Canadian dollar heads for biggest gain in two years after tariff reveal

By Fergal Smith

TORONTO, April 3 (Reuters) - The Canadian dollar rose to a near four-month high against the greenback on Thursday as Canada avoided fresh tariffs on its goods in a widening trade war that has led to investors ditching the American currency.

The loonie CAD= was trading 1.3% higher at 1.4050 per U.S. dollar, or 71.17 U.S. cents, putting the currency on track for its biggest advance since January 2023. The currency touched its strongest intraday level since December 6 at 1.4028.

Wall Street tumbled after U.S. President Donald Trump said he would impose a 10% baseline tariff on all imports to the United States and higher targeted duties on some of the country's biggest trading partners.

Goods from Canada and Mexico that comply with the USMCA trade agreement between the three countries will largely remain exempt from tariffs, except for auto exports and steel and aluminum which fall under separate tariff policies.

"We saw the initial reaction yesterday after the reciprocal tariff announcement - markets seemed to be celebrating the fact that there weren't any more tariffs on Canada," said Erik Bregar, director, FX & precious metals risk management at Silver Gold Bull.

"But overnight we've seen a collapse for the broader U.S. dollar."

The U.S. dollar .DXY posted sharp declines against a basket of major currencies as investors moved to price in four interest rate cuts this year from the Federal Reserve, up from three before the tariff announcement. 0#FEDWATCH

In contrast, investors have reduced bets on the Bank of Canada continuing its interest rate cutting campaign this month. 0#BOCWATCH

"I just don't think today is the day to be a hero and try to fade this," Bregar said. "This is a move where people are getting out and could continue maybe for another day or two."

Canadian bond yields were mixed across a steeper curve.

The 10-year yield CA10YT=RR was up half a basis point at 2.929%, while the gap between it and the U.S. equivalent narrowed by 13.5 basis points to about 113 basis points in favor of the U.S. note, the smallest since December 5.