08/20/2013 08:39 EDT | Updated 10/20/2013 05:12 EDT

Loonie lower, greenback rises on expectations Fed set to taper bond purchases

TORONTO - The Canadian dollar closed lower Tuesday amid continuing speculation about what the U.S. Federal Reserve may decide to do about cutting back on its bond purchasing program.

The loonie dropped 0.43 of a cent to 96.26 cents US.

Traders looked ahead to Wednesday and the release of the minutes from the Fed's most recent meeting at the end of last month.

A largely positive run of economic data has persuaded many investors that the central bank will start to taper its monthly bond purchases of US$85 billion, which have kept long-term rates low and encouraged a sharp run-up on many markets this year. They think the Fed could start winding up its third instalment of quantitative easing as early as September.

The prospect of the Fed tapering its massive bond purchases has sent U.S. bond yields higher. The benchmark U.S. 10-year Treasury was off 0.06 of a point from late Monday at 2.82 per cent. Bond yields have surged well over a full percentage point since Fed chairman Ben Bernanke first mentioned the possibility of the Fed cutting back in May.

"The recent market shift is on the back of Fed policy fears and the economic impact of rising bond yields globally," said Scotia Capital chief currency strategist Camilla Sutton.

"In this environment that combines rising risk aversion, tightening Fed policy and relative growth outlooks that favour the U.S., we expect the U.S. dollar to rally," Sutton said.

Speculation over Fed intentions pushed the September crude contract on the New York Mercantile Exchange down $2.14 to US$104.96 a barrel.

Copper was up a cent at US$3.34 a pound while gold climbed $6.90 to US$1,372.60 an ounce.

In economic news, Statistics Canada says wholesale trade fell 2.8 per cent to $48.8 billion in June after two months of gains. The federal agency says the drop was widespread, with sales down in all subsectors in June.

The biggest drop in dollar terms was in the miscellaneous subsector, which fell eight per cent because of a steep decrease in the agricultural supplies industry, the first such loss after six monthly gains in a row.

"With overall wholesale volumes falling by 2.9 per cent, the sector should be an acute drag to gross domestic product that month, which could be down by 0.6 per cent," said CIBC World Markets economist Emanuella Enenajor.

Traders will take in the release of Canadian retail sales data for June on Thursday and inflation data for July on Friday.