TORONTO: The Canadian dollar weakened against the greenback on Tuesday, continuing the previous session's drop as investors positioned ahead of a Bank of Canada policy decision later in the week.
The central bank shifted to a neutral policy stance late last year as it cited the weak inflation environment, a move that has weighed on the loonie.
A pick up in April's inflation rate had stoked some speculation that the Bank of Canada could sound moderately less dovish when it releases its statement on Wednesday, but last week's disappointing economic growth figures deflated those expectations.
The Bank of Canada is due to release its interest rate decision at the same time, which is forecast to remain unchanged at 1 percent. The central bank is seen keeping rates on hold until well into 2015.
"The first-quarter GDP data in our view gives them a little bit more wiggle room to still sound fairly cautious," said David Tulk, chief Canada macro strategist at TD Securities in Toronto.
"If anything, maybe some of the weakness that we have seen in the Canadian dollar over the last couple of days is in recognition that the Bank of Canada does not have to specifically reference some of the inflation strength, they can still hide behind the weaker growth story."
The Canadian dollar was at C$1.0917 to the greenback, or 91.60 US cents, weaker than Monday's close of C$1.0898, or 91.76 US cents.
The loonie has been stuck in a narrow trading range in recent weeks, but Monday's drop brought it close to breaking out of that band.
A close above C$1.0930 could set the currency up for further declines, said Tulk.
Canadian government bond prices were lower across the maturity curve, with the two-year down half a Canadian cent to yield 1.066 percent and the benchmark 10-year down 21 Canadian cents to yield 2.303 percent.
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