Canadian dollar nears a seven-week low on NAFTA deal uncertainty

TORONTO (Reuters) - The Canadian dollar weakened to a nearly seven-week low against its U.S. counterpart on Tuesday as an uncertain outlook for the NAFTA trade pact weighed on the currency and investors awaited an interest rate decision this week by the Bank of Canada.

FILE PHOTO: A Canadian dollar coin, commonly known as the "Loonie", is pictured in this illustration picture taken in Toronto, Ontario, Canada, January 23, 2015. REUTERS/Mark Blinch/File Photo

Canada and the United States ended talks to revamp the North American Free Trade Agreement on Friday without reaching a deal. Canadian officials are due to resume talks with their U.S. counterparts on Wednesday.

Investors have become less optimistic about a deal being reached over “the next little while,” said Erik Nelson, a currency strategist at Wells Fargo. “I don’t think people are, at least in my view, concerned that it won’t happen but it is just more the near term uncertainty.”

Canada sends about 75 percent of its exports to the United States, so its economy could be hurt if a deal is not reached.

The Bank of Canada has worried that an uncertain trade outlook will hurt business investment. The central bank is expected to leave its policy rate unchanged at 1.50 percent on Wednesday, a Reuters poll showed.

At 3:21 p.m. (1921 GMT), the Canadian dollar CAD=D4 was trading 0.7 percent lower at C$1.3183 to the greenback, or 75.86 U.S. cents. The currency touched its weakest level since July 20 at C$1.3208.

The pace of growth in Canada’s manufacturing sector eased in August for the second straight month as slower growth in new business offset the strongest expansion of production volumes in nearly eight years, data showed.

Canada’s trade data for July is due on Wednesday and the August employment report is due on Friday.

The U.S. dollar .DXY strengthened against a basket of currencies as concerns about a possible escalation in a trade conflict between the United States and China prompted investors to dump emerging-market currencies.

The price of oil, one of Canada's major exports, was supported by the evacuation of two Gulf of Mexico oil platforms in preparation for a hurricane. U.S. crude oil futures CLc1 settled 0.1 percent higher at $69.87 a barrel.

Canadian government bond prices were mixed across a steeper yield curve, with the 10-year CA10YT=RR falling 8 Canadian cents to yield 2.238 percent.

The gap between the 10-year yield and its U.S. equivalent widened by 3.7 basis points to a spread of 66.2 basis points in favor of the United States, its largest gap since July 30.

Reporting by Fergal Smith; Editing by Susan Thomas and Peter Cooney