06/12/2013 08:42 EDT | Updated 08/12/2013 05:12 EDT

Canadian dollar lower following strong gains amid improved chances of rate hike

TORONTO - The Canadian dollar erased early gains to close lower Wednesday amid higher commodity prices and positive economic data from Europe.

The loonie was down 0.23 of a cent to 97.92 cents US.

Eurozone area industrial production increased 0.4 per cent in April compared with the previous month, the third consecutive monthly increase. Economists had expected no change.

The Canadian currency has rallied in recent days and is still up about 1 1/2 cents US since the beginning of June.

For one thing, Scotia Capital noted that expectations for an interest rate hike by the Bank of Canada have risen.

"The Overnight Index Swap market (is) now pricing in a 32 per cent chance of a hike in the next 12-months," said Scotiabank's chief currency strategist, Camilla Sutton.

"These expectations have been shifting higher as expectations for the Fed to begin stepping out of (quantitative easing) have risen."

Markets have been volatile over the past couple of weeks after Fed chairman Ben Bernanke said the U.S. central bank might pull back on its bond-buying program if economic data, especially hiring, improved significantly. Other Fed officials have spoken about a winding down of asset purchases sooner.

Sutton also observed that recent Canadian economic news has been encouraging, including much better than expected reports on housing starts and on May employment.

Oil prices have also been supportive as the spread between Western Canadian select and West Texas Intermediate crude has fallen to a nine-month low of $11.

Commodity prices advanced Wednesday with the July crude contract on the New York Mercantile Exchange up 50 cents to US$95.88 a barrel.

July copper rose three cents to US$3.23 a pound after worries about Chinese growth helped send the metal down 17 cents over the previous four sessions. Uncertainty about China’s recovery has weighed on markets following weekend data showing exports, retail sales and other indicators weaker than expected.

August gold bullion rose $15 to US$1,392 an ounce.