TORONTO: The Canadian dollar weakened to a one-week low against its US counterpart on Tuesday after Canada's economy accelerated less than forecast and oil fell, while firm US economic data left the door open to interest rate increases by the Federal Reserve.
The losses left the loonie more than 4 percent lower for the month of May, while it has fallen 5 percent since reaching a 10-month high at C$1.2461 on May 3.
Canada's gross domestic product (GDP) grew at a 2.4 percent annualized rate in the first quarter, shy of analysts' expectations for 2.9 percent. Moreover, a deeper-than-expected 0.2 percent drop in March GDP left a weak starting point for the second quarter.
"It is going to make the Bank (of Canada) cautious, but they are probably going to see some sizable swings in the GDP numbers in the next couple of quarters, reflecting the shifts in oil production," said Paul Ferley, assistant chief economist at Royal Bank of Canada.
The central bank has already signaled a likely contraction in second quarter growth after wildfires disrupted oil production in Alberta.
US consumer spending recorded its biggest increase in more than six years in April and inflation rose steadily, more signs of an acceleration in economic growth that could persuade the Federal Reserve to raise interest rates again as early as June.
"A recalibration of Fed hike expectations has weighed on the loonie recently, as higher interest rates would benefit its US counterpart," said Scott Smith, senior market analyst at Cambridge Global Payments.
The Canadian dollar ended at C$1.3110 to the greenback, or 76.28 US cents, weaker than Monday's close of C$1.3051, or 76.62 US cents.
The currency's strongest level of the session was C$1.3016, while it touched its weakest since May 24 at C$1.3135.
Oil prices dipped as a stronger dollar and slide in equity prices sparked profit-taking. US crude futures settled at $49.10 a barrel, down 23 cents.
Canadian government bond prices were higher across the maturity curve, with the two-year price up 7 Canadian cents to yield 0.616 percent and the benchmark 10-year rising 29 Canadian cents to yield 1.322 percent.
Falling yields on the Canada two-year bond pushed its yield 3.2 basis points further below the comparable US Treasury for a spread of -26.3 basis points, while the Canadian 10-year yield dropped 4.6 basis points further below the comparable US Treasury yield, for a spread of -52.8 basis points.
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