09/11/2013 09:10 EDT | Updated 11/11/2013 05:12 EST

Loonie strengthens against weaker U.S. dollar; lessened Syrian tensions

TORONTO - The Canadian dollar was up slightly Wednesday as tensions in the Middle East eased after the U.S. administration said it will back off from military action if Syria hands its chemical weapons over to international control.

The loonie was ahead 0.31 of a cent to 96.95 cents US.

The development followed weeks of White House efforts to gain support for a U.S.-led military action against Syria for an alleged sarin gas attack on Aug. 21 in a suburb of Damascus that killed 1,429 people. The Syrian government has denied responsibility.

The loonie has also been lifted this week as the U.S. dollar weakened over uncertainty about what will come of next week's Federal Reserve policy meeting.

Over recent weeks, the markets have priced in the likelihood that the Fed will start to reduce its monthly $85 billion in asset purchases. The main question for most traders is how much and when.

The U.S. dollar's near-term fortunes likely rest on the Fed policy decision. In recent days the currency has traded within fairly narrow ranges against other major currencies and that trend continued Wednesday.

"If the risks over Syria are diminishing and it looks like it might be settled through diplomatic channels one way or another . . . then you would be less cautious as an investor and less prone to buy the U.S. dollar and U.S. treasuries in that environment as a safe haven," said Derek Holt, vice-president of economics at Scotiabank.

But Holt added that investors will flock to the U.S. greenback if they believe there will be big changes next week regarding the Fed's quantitative easing program. At this time, it doesn't look like that will be the case.

"If you're going into next week thinking that the Fed reserve is going to cut back on (bond) purchases and signal a significant shift on monetary policy towards being more so-called hawkish, then you would want to own more U.S. dollars," he said. "It would make the dollar look a little bit more favourable... The market doesn't have the clarity it needs yet."

Lessened instability in Syria has also flattened commodity prices, after they experienced a drop earlier in the week. The October crude contract on the New York Mercantile Exchange was up 17 cents to US$107.56.

Gold prices fell 20 cents to US$1,363.80 an ounce and December copper was unchanged at $3.26 a pound.