12/15/2014 08:43 EST | Updated 02/14/2015 05:59 EST

Loonie below 86 cents US, greenback strengthens ahead of Fed rate announcement

TORONTO - The Canadian dollar closed below 86 cents US Monday, hitting fresh 5 1/2 year lows as oil prices continued its downward spiral while the U.S. currency strengthened ahead of this week's interest rate announcement from the Federal Reserve.

The loonie moved down 0.63 of a cent to 85.79 cents US.

Oil prices continued to seek a floor after falling 12 per cent last week alone. But a minor gain in the morning evaporated and January crude dropped $1.90 to US$55.91 a barrel.

Crude prices have plunged more than 40 per cent since mid-summer amid a huge supply and demand imbalance, made worse by OPEC's decision late last month not to cut production to support prices. The steep fall in oil prices has depressed the Canadian dollar, with the currency down eight per cent since July.

Meanwhile, the Fed makes its interest rate announcement Wednesday afternoon.

U.S. short-term interest rates are expected to start rising sometime in 2015 but the timing is unclear. The Fed has committed to keeping short-term rates ultra-low "for a considerable period of time" for several years and markets will look to see if there is any change in that wording.

Also out in the U.S. this week is data covering industrial production, housing starts and the November reading on inflation.

There are also a number of important bits of Canadian data being released this week. Statistics Canada will release the latest readings on manufacturing shipments and retail trade and the November reading on the consumer price index.

The stronger American currency pressured metal prices, with February gold bullion down $14.80 to US$1,207.70 an ounce. March copper edged six cents lower to US$2.88 a pound.