The Canadian dollar strengthened against its U.S. counterpart on Wednesday, recovering from its lowest level in nearly four months as the Federal Reserve signaled its inflation target had been met and that it would raise interest rates in 2022. Wall Street rallied after the U.S. central bank issued fresh economic projections showing three rate hikes in the cards next year and said it would end its pandemic-era bond purchases in March as it exits from policies enacted at the start of the health crisis. read more Canada is a major producer of commodities, including oil, so the loonie tends to be sensitive to investor appetite for risk. U.S. crude oil futures settled 0.2% higher at $70.87 a barrel as U.S. inventory data showed strong consumer demand, while the Canadian dollar was trading 0.1% higher at 1.2844 to the greenback, or 77.86 U.S. cents. Earlier, the currency touched its weakest level since Aug. 20 at 1.2936 as investors worried that the fast-spreading Omicron variant could derail economic recovery. "The Canadian dollar is treading in dangerous waters at the moment," said Adam Button, chief currency analyst at ForexLive. "The market is wrestling with the increasing likelihood of lockdowns in China due to Omicron." Shutdowns in China could be particularly harmful to a commodity exporter like Canada. It could also add to supply disruptions that are pushing up inflation. Canada"s annual inflation rate remained at 4.7% in November, the highest since March 2003, Statistics Canada said. read more Still, the slack in Canada"s economy caused by the pandemic has substantially diminished, Bank of Canada Governor Tiff Macklem said, a key sign the central bank is set to begin hiking rates soon. read more Canadian government bond yields were mixed across a flatter curve. The 10-year rate touched its lowest level since Sept. 27 at 1.386% before recovering to 1.412%, down 2.1 basis points on the day. Reporting by Fergal Smith Editing by Paul Simao Our Standards: The Thomson Reuters Trust Principles.