May 31, 2017 / 1:54 PM / in 3 months

Canadian dollar dips as slumping oil prices offset strong GDP data

A Canadian dollar coin, commonly known as the "Loonie", is pictured in this illustration picture taken in Toronto January 23, 2015.Mark Blinch

TORONTO (Reuters) - The Canadian dollar weakened against its U.S. counterpart on Wednesday as a drop in oil prices offset data showing strength in the domestic economy.

Canada's gross domestic product grew at an annualized 3.7 percent pace, slightly below economists' expectations for 3.9 percent, though growth in both the third and fourth quarters of 2016 was revised upward.

The economy also appeared to have solid momentum heading into the second quarter with growth rising by a better-than-expected 0.5 percent in March.

"If we continue to get growth numbers like this ... it's going to be tougher for the Bank of Canada to avoid rate hikes at some point in the distance," said Derek Holt, head of capital markets economics at Scotiabank.

The central bank last week struck a more upbeat tone than investors had expected as it kept interest rates on hold at 0.5 percent.

Chances of a Bank of Canada rate hike this year have increased to 30 percent from roughly one-in-ten before the interest rate decision, data from the overnight index swaps market showed.

Prices of oil, one of Canada's major exports, fell on Wednesday to a three-week low on news that Libyan output was recovering from an oilfield technical issue, fuelling concerns that Organization of the Petroleum Exporting Countries-led output cuts were being undermined by producers outside the deal.

U.S. crude CLc1 prices were down 2.52 percent at $48.41 a barrel.

At 9:21 a.m. ET (1321 GMT), the Canadian dollar CAD=D4 was trading at C$1.3477 to the greenback, or 74.20 U.S. cents, down 0.1 percent.

The currency traded in a range of C$1.3438 to C$1.3479 after having hit on Tuesday its weakest in nearly one week at C$1.3506.

Canadian government bond prices were mixed across a slightly steeper yield curve. The two-year CA2YT=RR was flat to yield 0.70 percent and the 10-year CA10YT=RR declined 6 Canadian cents to yield 1.421 percent.

On Monday, the 10-year yield hit its lowest intraday level in six months at 1.399 percent.

Canada's trade data for April is due on Friday.

Additional reporting by Alastair Sharp; Editing by Meredith Mazzilli

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