CANADA FX DEBT-C$ hits 3-week low as soft inflation revives rate cut threat

(Adds broker comment, updates prices to close)
    * Canadian dollar settles at $1.3497, or 74.09 U.S. cents
    * Bond prices mostly lower across the yield curve

    By Alastair Sharp
    TORONTO, Dec 22 (Reuters) - The Canadian dollar tumbled to a
three-week low against its U.S. counterpart on Thursday,
pressured by domestic inflation data that reminded the market of
the risk of further interest rate cuts from the Bank of Canada.
    Canada's annual inflation slowed in November to 1.2 percent
from a rate of 1.5 percent in October, Statistics Canada said.
Forecasts had put the rate at 1.4 percent. 
    "That Canadian inflation data miss clearly gave another shot
in the arm to dollar-Canada and it forced us through C$1.35,"
said Brad Schruder, director of corporate sales and structuring
at BMO Capital Markets.
    The Canadian dollar ended the day at C$1.3497 to
the greenback, or 74.09 U.S. cents, weaker than Thursday's close
of C$1.3407, or 74.59 U.S. cents.
    "To the extent that a (Bank of Canada interest) rate cut was
discussed in October, I don't think today's numbers rule that
out," said Desjardins Senior Economist Jimmy Jean.
    The last interest move by Canada's central bank was a cut in
July 2015, while the U.S. Federal Reserve raised rates earlier
this month and signaled a faster pace of increases in 2017.
    That policy divergence has widened the spread between
Canada's bond yields and U.S. Treasuries, and has weighed on the
    The currency's strongest level of the session was C$1.3414,
while it touched its weakest since Nov. 28 at C$1.3520.
    Notwithstanding likely choppy and low-volume trade into
year-end, BMO's Schruder said the currency could come under
further pressure.
    "I wouldn't be shocked to see, in the early part of January,
a 'sell North America' trade going on," Schruder said, as
investors pull back on bets that U.S. President-elect Donald
Trump's plans for deregulation and infrastructure spending will
quickly boost the economy.    
    U.S. stocks have rallied since the Nov. 8 election, with the
Dow up 9 percent and the S&P 500 gaining 6 percent.
    Trump, who has vowed to renegotiate the North American Free
Trade Agreement with Canada and Mexico, named an economist who
has urged a hard line on trade with China to head a newly formed
trade council, his transition team said on Wednesday.
    Economists worry that trade uncertainty will derail an
expected pickup in Canadian business spending. 
    Canadian government bond prices were mostly lower across the
yield curve, although the two-year rose half a
Canadian cent to yield 0.829 percent. The benchmark 10-year
 declined 14 Canadian cents to yield 1.820 percent.
    Canada's gross domestic product data for October is due on

 (Additional reporting by Fergal Smith; Editing by Jonathan