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Market optimism over Keystone XL pipeline sends Canadian dollar higher

TORONTO - The Canadian dollar closed higher Monday amid optimism that the controversial Keystone XL pipeline will get U.S. approval.

The loonie closed off session highs but still rose 0.33 of a cent to 90.11 cents US since the pipeline would boost shipments from the oilsands and give a lift to the Canadian economy.

The loonie went as high as 90.6 cents US before U.S. Treasury yields strengthened during the day as traders increasingly looked for safe havens, generally avoiding commodity based currencies, oil and metals, and equities.

The benchmark U.S. 10-year Treasury dropped about seven basis points to 2.587 per cent late in the afternoon.

The U.S. State Department said Friday that the proposed TransCanada (TSX:TRP) pipeline would produce less greenhouse gas emissions compared with transporting oil to the Gulf of Mexico by rail.

"This is likely to sway Secretary of State (John) Kerry to provide a favourable recommendation to President (Barack) Obama on the construction of the pipeline, which will provide added capacity for Canadian oil to flow into the U.S.," observed Camilla Sutton, chief FX strategist for Scotiabank.

There was also a positive outlook from the International Monetary Fund, which said it expects the Canadian economy will grow 2.2 per cent this year, up from an estimated 1.7 per cent in 2013.

Meanwhile, emerging market worries weighed on financial markets as data showing a slowdown in Chinese manufacturing added to concerns about countries such as Turkey, South Africa and India, all of which had to hike rates last week to support their currencies.

These countries and others have been hit by an outflow of investor funds as the U.S. Federal Reserve cuts back on its massive monthly bond purchases, a move that kept long-term rates low and resulted in a flow of cheap money into those markets.

But the primary worry is that weaker growth in those countries could drag down developed markets.

China's official purchasing managers' index showed the manufacturing sector came in at 51.5, down from 52.5 in December. Any reading above 50 signals expansion.

Sentiment was also hurt by disappointing American data. The U.S. Institute for Supply Management said its January manufacturing index dropped to 51.3 during January from 56.5 in December.

In Canada, Royal Bank's purchasing managers manufacturing index for January came in at 51.7, down from 53.5 in December.

On the commodity markets, March crude oil in New York dipped $1.06 to US$96.43 a barrel.

March copper was down a cent to US$3.19 a pound while April gold gained $20.10 to US$1,259.90 an ounce.

The Canadian Press

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