Canadian dollar tumbles to eight-month low as traders see only gradual rate hikes

(Reuters) - The Canadian dollar touched a fresh more than eight-month low against the greenback on Friday as the market continued to assess how quickly more interest rate hikes could come in the face of trade uncertainty with the United States.

A Canada Dollar note is seen in this June 22, 2017 illustration photo. REUTERS/Thomas White/Illustration

The currency hit a session low of C$1.3099, its lowest since June 28, shortly before the Bank of Canada began raising interest rates last year.

For the week, the currency shed 2.2 percent, putting it on track for its biggest weekly decline since May 2016.

The loonie has been hit by comments from the head of the Bank of Canada, who said on Tuesday that the economy may be able to generate more growth without higher inflation, given the untapped potential in the labor market.

Governor Stephen Poloz’s remarks reinforced expectations the central bank can take its time raising rates after hiking three times since last July.

“The market interpreted that as it means that it’s far less likely that the Bank of Canada will move forward with further interest rate increases,” said Sean Coakley, market strategist at Cambridge Global Payments.

“At the same time, we’ve seen much more hawkish commentary out of the Federal Reserve in the United States and that’s really positioned the U.S. dollar much stronger than the loonie,” said Coakley.

At 4:02 p.m. EDT (2002 GMT), the Canadian dollar CAD=D4 was trading down 0.3 percent at C$1.3093 to the greenback, or 76.38 U.S. cents.

Markets also expect Canadian policymakers may wait for greater clarity on the future of U.S. trade policy after worries about a global trade war ramped up after President Donald Trump imposed tariffs on steel and aluminum imports this month.

While Canada was exempted, Trump said the reprieve would be in place so long as there was progress on talks to renegotiate the North American Free Trade Agreement.

On the economic front, Canadian factory sales in January fell by 1.0 percent, the biggest drop in six months, on weakness in motor vehicles, as well as aerospace products and parts.

Foreign investment in Canadian securities resumed in January after a dip in December but fell far short of the monthly purchases seen in much of the second half of 2017.

Canadian government bond prices were mixed across the maturity curve, with the two-year CA2YT=RR price down 0.5 Canadian cent to yield 1.763 percent and the benchmark 10-year CA10YT=RR rising 4 Canadian cents to yield 2.141 percent.

Reporting by Leah Schnurr in Ottawa; Editing by Nick Zieminski and James Dalgleish