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Canadian dollar gains 0.5% against the greenback

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Price of U.S. oil settles 3.6% lower

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Canadian factory activity slows in April

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Bond yields ease across the curve

By Fergal Smith

TORONTO, May 1 (Reuters) - The Canadian dollar

strengthened against its U.S. counterpart on Wednesday, clawing

back some of the previous day's sharp decline, as the Federal

Reserve's signaling about prospects for interest rate cuts was

not as hawkish as some investors had feared.

The loonie was trading 0.5% higher at 1.3710 to the

U.S. dollar, or 72.94 U.S. cents, after it touched intraday on

Tuesday an 11-day low at 1.3784.

The currency has been pressured in recent weeks by a wider

gap between U.S. and Canadian yields as investors anticipated a

delayed start to Fed rate cuts.

The U.S. central bank on Wednesday held interest rates

steady and signaled it is still leaning towards eventual

reductions in borrowing costs, but put a red flag on recent

disappointing inflation readings and suggested a possible stall

in the movement towards more balance in the economy.

"It seems like Fed officials are opting to simply tweak

their previous plans rather throw them out the window," said

Royce Mendes, managing director and head of macro strategy at

Desjardins.

The U.S. dollar fell against a basket of major

currencies after the Fed decision.

Canadian manufacturing activity slowed in April, extending a

lengthy period of contraction for the sector. The S&P Global

Canada Manufacturing Purchasing Managers' Index (PMI) fell to a

seasonally adjusted 49.4 in April from 49.8 in March, staying

below the 50 threshold for the 12th straight month.

The price of oil, one of Canada's major exports,

settled 3.6% lower at $79.00 a barrel on a surprise build in

U.S. crude stocks and the prospect of a Middle East ceasefire

agreement.

Canadian government bond yields fell across the curve,

tracking moves in U.S. Treasuries. The 10-year was

down 8.8 basis points at 3.730%.