Canadian dollar slides the most in eight months as Poloz dampens rate hike bets

TORONTO (Reuters) - The Canadian dollar suffered its biggest drop in eight months against the greenback on Wednesday while short-term bond yields fell after Bank of Canada Governor Stephen Poloz dampened expectations for further interest rate hikes this year.

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

At 5 p.m. EDT (2100 GMT), the Canadian dollar CAD=D4 was trading at C$1.2478 to the U.S. dollar, or 80.14 U.S. cents, down 1 percent, which was its deepest loss since Jan. 18 when the central bank had said a rate cut remained on the table.

The currency’s strongest level of the session was C$1.2336, while it touched C$1.2483, its weakest since Sept. 1.

“It’s been a pretty tough day for the Canadian dollar,” said Jimmy Jean, senior economist at Desjardins Capital Markets. “The big driver today was the Poloz speech, which the market quickly labeled as dovish.”

Poloz said the central bank will closely watch movements in longer-term interest rates and the exchange rate as it considers how to follow its two recent interest rate hikes.

The mention of the currency is the “big takeaway,” said Eric Theoret, currency strategist at Scotiabank.

The loonie has rallied nearly 8 percent this year. A further rapid appreciation of the loonie could put the brakes on the country’s economy just as it is gaining momentum.

Chances of another Canadian rate hike this year fell to 81 percent from almost 100 percent before the release of Poloz's remarks, overnight index swaps data showed. BOCWATCH

Losses for the loonie came as the U.S. dollar .DXY rose to more than a one-month high against a basket of currencies, as optimism about U.S. fiscal reforms boosted sentiment in favor of the greenback.

Prices of oil, one of Canada's major exports, edged higher, helped by an unexpected drop in U.S. crude inventories. U.S. crude CLc1 prices settled 26 cents higher at $52.14 a barrel.

Canadian government bond prices were mixed across the yield curve, with the two-year CA2YT=RR price up 4.5 Canadian cents to yield 1.583 percent and the 10-year CA10YT=RR falling 17 Canadian cents to yield 2.134 percent.

The gap between Canada’s 2-year yield and its U.S. equivalent narrowed by 4.9 basis points to a spread of 10.4 basis points.

Reporting by Fergal Smith; Editing by Paul Simao and Phil Berlowitz