Canadian dollar hits 5-month low as BoC pauses rate hikes

A Canadian dollar coin, commonly known as the "Loonie", is pictured in this illustration picture taken in Toronto

By Fergal Smith

TORONTO (Reuters) - The Canadian dollar weakened to a five-month low against its U.S. counterpart on Wednesday as the Bank of Canada left rates on hold as data showed unexpected strength in the U.S. services sector, boosting the greenback.

The loonie was trading 0.1% lower at 1.3660 to the greenback, or 73.21 U.S. cents, after touching its weakest level since March 28 at 1.3676.

"The price action reflects a balanced Bank of Canada statement," said Bipan Rai, global head of FX strategy at CIBC Capital Markets.

"There was some concern with respect to underlying inflation. That still keeps the door ajar for further hikes but by and large we think the bank is done (hiking) here."

The Canadian central bank held its key interest rate at 5%, noting the economy had entered a period of weaker growth.

"With respect to dollar-Canada, I am still a bit concerned about top-side risk ... I don't think we are pricing in enough in terms of (BoC) easing for 2024," Rai said.

Money markets see roughly 50 basis points of rate cuts by the Bank of Canada in 2024, compared to nearly 100 basis points by the Federal Reserve.

The U.S. dollar added to its recent gains against a basket of major currencies as the Institute for Supply Management (ISM) said its non-manufacturing PMI rose last month to its highest level since February.

Domestic data showed that Canada recorded a smaller-than-expected trade deficit of C$987 million in July as a West Coast dock workers' strike weighed more heavily on imports than on exports.

The Canadian 2-year yield rose 3.2 basis points to 4.696%, but was trading 3.3 basis points further below its U.S. equivalent to a gap of 33.5 basis points in favor of the U.S. note. That's the widest gap since May 3.

(Reporting by Fergal Smith; Editing by Nick Macfie)