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TORONTO (Reuters) - The Canadian dollar slumped to a three-week low against the U.S. dollar on Wednesday as expectations of higher interest rates were pared back further after data showed the Canadian economy stalled unexpectedly in April.
Government data showed real gross domestic product in Canada was flat in April after seven straight months of expansion, disappointing market expectations for 0.2 percent growth and casting doubt on the pace of interest rate hikes by the Bank of Canada.
Currencies usually strengthen as interest rates rise as higher rates attract capital flows.
Expectations for a Bank of Canada rate rise in July, as measured by yields on overnight index swaps, dropped to around 50 percent on Wednesday from around 80 percent just last week.
The Canadian dollar touched C$1.0649 to the U.S. dollar, or 93.91 U.S. cents, late in the session, its lowest point since June 7.
It finished not far off the intraday low at C$1.0646 to the U.S. dollar, or 93.93 U.S. cents, down from Tuesday's finish of C$1.0553 to the U.S. dollar, or 94.76 U.S. cents.
For the quarter, the Canadian dollar is off nearly 5 percent, falling from a perch near U.S. dollar parity, as European debt concerns and evidence of an uneven global economic recovery have taken a toll.
"There were a number of moving parts for the Canadian dollar today, led by the softer-than-expected GDP number," said Jack Spitz, managing director of foreign exchange at National Bank Financial.
He also pointed to news that Moody's Investors Service said it may cut Spain's debt rating, reviving worries about Europe's debt troubles, and said the Canadian dollar also tracked a steep fall in U.S. equity markets. The commodity-linked currency was further pressured by a lower oil price.
The currency switched tracks after the GDP data. Earlier in the day, it was firmer as jitters about bank funding in the euro zone eased.
Shaun Osborne, chief currency strategist at TD Securities, said the outlook for the Canadian dollar is weaker and that it could easily fall to C$1.12 to C$1.15 to the U.S. dollar.
"The risk reward suggests to us that there's a lot less upside in the Canadian dollar relatively to the downside potential from here so we favor buying U.S. dollars and selling Canada," he said.
Spitz said risk was also being pulled ahead of Thursday's market holiday in Canada and Friday's June nonfarm payrolls data in the United States.
U.S. jobs are forecast to have fallen in June for the first time this year as many of the 411,000 temporary workers hired in May to complete the census were laid off.
Canadian government bonds closed flat after big gains earlier in the session that were triggered by the GDP data as traders squared positions ahead of the U.S. jobs figures.
The two-year government bond climbed 3 Canadian cents to yield 1.391 percent, while the 10-year bond was up 4 Canadian cents to yield 3.087 percent.
Canadian bonds were mixed against U.S. Treasury issues, with short-term bonds outperforming and long-dated issues underperforming. The Canadian 10-year bond yield was 14.9 basis points above its U.S. counterpart, compared with 13.9 basis points in the previous session.
Additional reporting by Jennifer Kwan; editing by Peter Galloway