The Canadian dollar strengthened against a weaker greenback on Friday in thin pre-holiday market trading, and capped off an overall gain for 2016. The loonie saw an annual gain for the first time since 2012, firming nearly 3 percent for this year. The dollar index, which measures the US dollar against a basket of six major rivals, gained about 3.7 percent for the year. Overseas, a short-lived surge in the euro dominated foreign exchange markets on Friday, with a lack of liquidity and automated short-covering in euro exacerbating moves.

The Canadian dollar finished trading at C$1.3427 to the US dollar, or 74.48 US cents, stronger than the Bank of Canada's official close of C$1.3508, or 74.03 US cents. "A lot of it was about month-end, year-end flows, and position squaring ahead of the new year," said David Bradley, director of foreign exchange trading at Scotiabank. The currency traded between C$1.3401 and C$1.3505, touching its strongest level since before Christmas.

The price of oil, a key Canadian export, was lower on Friday, but notched its biggest annual gain since 2009 after Opec and other major producers agreed to output cuts. US crude prices were up 0.06 percent to $53.80 a barrel, while Brent crude lost 0.18 percent to $56.75. The Canadian dollar, which outperformed its key currency counterparts, was trading in line with market expectations for the end of 2016. "Overall, the market is looking for US dollar strength for the first half of 2017, followed by perhaps some Canadian dollar strength into the latter part of 2017," said Jack Spitz, managing director of foreign exchange at National Bank Financial, pointing to expectations the Federal Reserve will hike interest rates in 2017, in contrast to forecasts for the Bank of Canada and elsewhere.

Copyright Reuters, 2017