CANADA FX DEBT-C$ pares losses on prospects of U.S. tariffs exemption

 (Adds details and updates prices)
    * Canadian dollar at C$1.2897, or 77.54 U.S. cents
    * Loonie matches Monday's low as weakest in 8 months
    * Bond prices mixed across the yield curve
    * Bank of Canada leaves benchmark rate at 1.25 percent

    By Fergal Smith
    TORONTO, March 7 (Reuters) - The Canadian dollar weakened
against the greenback on Wednesday as the Bank of Canada worried
about trade policy developments, but the loonie pared its loses
on prospects of an exemption from U.S. metals tariffs.
    The Bank of Canada said that trade policy is an "important
and growing source of uncertainty for the global and Canadian
outlooks," as it left its benchmark interest rate unchanged at
1.25 percent.             
    Canada sends 75 percent of its exports to the United States.
Its economy could be hurt by an uncertain outlook for the North
American Free Trade Agreement and a potential global trade war.
    The resignation of top U.S. economic adviser Gary Cohn could
give free trade skeptics the upper hand in the White House. But
the White House said Canada and Mexico, and possibly other
countries, may be exempted from planned U.S. import tariffs on
steel and aluminum on the basis of national security.
    "The real big issue is you still probably have another rate
hike you have to price out for this year," said Mark McCormick,
North American head of FX Strategy at TD Securities. "It has
been our view for the last month or so that two more hikes
priced in this year is pretty aggressive."
    The Bank of Canada has raised its benchmark interest rate
three times since July. The amount of further tightening
anticipated this year by money markets slipped to 46 basis
points from 50 on Tuesday.                    
    Canada's trade deficit narrowed more than expected to C$1.91
billion in January as imports pulled back from a record high,
but exports tumbled by the most in six months.             
    The price of oil, one of Canada's major exports, fell after
U.S. government data showed an increase in inventories. U.S.
crude oil futures        settled 2.3 percent lower at $61.15 a
    At 4 p.m. EST (2100 GMT), the Canadian dollar          was
trading 0.2 percent lower at C$1.2897 to the greenback, or 77.54
U.S. cents. The currency matched Monday's low at C$1.3002, which
was its weakest since July 5.
    Still, the Canadian dollar is forecast to rally over the
coming year, a Reuters poll showed, as global economic strength
and a broadly weaker greenback offset investor fears of a trade
    Canadian government bond prices were mixed across the yield
curve, with the 10-year             falling 5 Canadian cents to
yield 2.239 percent.
    Canada's employment report for February is due on Friday.

 (Reporting by Fergal Smith
Editing by Susan Thomas and James Dalgleish)