Canadian dollar slides as economy slows, U.S. moves on tariffs

TORONTO (Reuters) - The Canadian dollar weakened against its U.S. counterpart on Thursday, reversing much of its gains from the day before, after data showed weaker-than-expected growth in the domestic economy and U.S. tariffs dented prospects for NAFTA trade pact talks.

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/File Photo

At 3:44 p.m. EDT (1944 GMT), the Canadian dollar CAD=D4 was trading 0.7 percent lower at C$1.2960 to the greenback, or 77.16 U.S. cents.

The currency’s weakest level of the session was C$1.2990, while it touched its strongest intraday since May 23 at C$1.2819.

The United States on Thursday said it will impose tariffs on aluminum and steel imports from Canada, Mexico and the European Union, reigniting investor fears of a global trade war as Washington’s allies took steps to retaliate against U.S. goods.

U.S. President Donald Trump announced the tariffs in March as part of an effort to protect U.S. industry and workers from what he described as unfair international competition, a key theme of his “America First” agenda.

Canadian Foreign Minister Chrystia Freeland said Ottawa will impose retaliatory tariffs on C$16.6 billion worth of U.S. exports and challenge U.S. steel and aluminum tariffs under the North American Free Trade Agreement as well as at the World Trade Organization.

“Trump is willing to take short-term blows in order to negotiate more aggressive trade deals,” said Christian Lawrence, senior market strategist at Rabobank. “This doesn’t bode well for NAFTA negotiations.”

Canada sends about 75 percent of its exports to the United States so its economy could be hurt if NAFTA is scrapped.

An uncertain trade outlook has been one source of worry for the Bank of Canada. But chances of a Canadian interest rate hike as soon as July were boosted on Wednesday by a more hawkish than expected policy statement from the central bank BOCWATCH.

While uncertainty can come from many sources, monetary policy decisions must always be forward looking, BoC Deputy Governor Sylvain Leduc said on Thursday, reiterating that the central bank expects higher interest rates will be needed to keep inflation near its target.

Still, Canada’s economy grew at its slowest pace in nearly two years in the first quarter amid cooler exports and a weaker housing sector, Statistics Canada said.

Gross domestic product grew in the first three months of 2018 at an annualized rate of 1.3 percent, short of expectations for 1.8 percent.

U.S. crude oil futures CLc1 settled 1.7 percent lower at C$67.04 a barrel despite a larger-than-expected decline in inventories. Oil is one of Canada's major exports. [O/R]

Canadian government bond prices were higher across the yield curve. The 10-year CA10YT=RR rose 33 Canadian cents to yield 2.228 percent.

Reporting by Fergal Smith, editing by G Crosse