TORONTO: The Canadian dollar weakened to a two-week low against its US counterpart on Monday as oil fell, although it pared some losses as investors reduced bets for a US interest rate hike as soon as September.
The probability of a Federal Reserve rate increase in September fell to 21 percent, according to CME Group's FedWatch tool. It rose to 33 percent on Friday following comments from Fed officials, including Fed Chair Janet Yellen.
Reduced chances of Fed rate hikes came as data showed the central bank's preferred inflation measure continued to run well below its 2 percent target in July and as investors turned attention to the release of US jobs data at the end of the week.
"A lot depends on the (US) jobs figures ... if the Fed sees more tightening in the labour market I think that raises the case that we could actually see the Fed move in September," said Scott Smith, senior market analyst at Cambridge Global Payments.
US crude oil futures settled 66 cents lower at $46.98 a barrel, pressured by high output from Middle East OPEC members and recent strengthening in the US dollar.
A subdued price for oil, which is one of Canada's major exports, will contribute to divergence in economic growth between the United States and Canada in the second half of 2016 and in 2017, said Smith, who expects the loonie to weaken to between C$1.3300 and C$1.3500 by year end.
The Canadian dollar ended at C$1.3022 to the greenback, or 76.79 US cents, weaker than Friday's close of C$1.3000, or 76.92 US cents.
The currency's strongest level of the session was C$1.2975, while it touched its weakest since Aug. 11 at C$1.3048.
Speculators raised bullish bets on the Canadian dollar for the first week in four, Commodity Futures Trading Commission data showed on Friday.
Canadian government bond prices were higher in sympathy with US Treasuries. The two-year bond rose 3.5 Canadian cents to yield 0.589 percent and the benchmark 10-year climbed 60 Canadian cents to yield 1.029 percent.
The curve flattened, as the spread between the 2-year and 10-year yields narrowed by 4.5 basis points to 44 basis points, its narrowest since January 2008, indicating outperformance for longer-dated bonds.
Canada's gross domestic product data for the second quarter and June are due on Wednesday.
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