Canadian dollar hits 2-year low as inflation pressures ease

By Fergal Smith

TORONTO (Reuters) - The Canadian dollar weakened to its lowest level in nearly two years against its U.S. counterpart on Tuesday as the greenback broadly climbed and domestic data showed inflation easing more than expected in August.

Canada's annual inflation rate slowed to 7.0% in August, below analyst forecasts of 7.3% and down from 7.6% in July.

Much of the deceleration was due to lower gasoline prices and slower gains in the shelter index, but all three core measures of inflation also eased slightly.

The data comes ahead of a speech by Bank of Canada Deputy Governor Paul Beaudry, with the text due to be available on the central bank's website at 3:30 p.m. ET (1930 GMT).

Money markets see an 85% probability of a 50-basis-point interest rate hike by the BoC in October, after having fully priced in a move of that magnitude before the inflation data.

The inflation data, as well as the selloff in oil and stocks weighed on the Canadian dollar, said George Davis, chief technical strategist at RBC Capital Markets, adding that the "risk-off tone" gave the U.S. dollar a broad-based boost.

Wall Street fell ahead of a Federal Reserve interest rate decision on Wednesday, while the price of oil followed other risk assets lower, settling down 1.5% at $84.45 a barrel. Oil is one of Canada's major exports.

The Canadian dollar touched its weakest since October 2020 at 1.3374 per U.S. dollar, or 74.77 U.S. cents, down 0.9% on the day. Since the start of 2022, the currency has lost 5.5%.

Canadian government bond yields were lower the curve. The 10-year eased nearly 5 basis points to 3.103%, while it fell about 11 basis points further below the equivalent U.S. rate to a differential of 45.2 basis points.

(Reporting by Fergal Smith, Editing by William Maclean and Sandra Maler)