Canadian dollar adds to losses on dovish Bank of Canada

By Fergal Smith

TORONTO (Reuters) - The Canadian dollar weakened against its U.S. counterpart on Thursday, adding to losses from the previous session, when the Bank of Canada held interest rates steady and tempered expectations for a hike early next year.

The central bank struck a more dovish tone than investors had expected after last week's strong employment data.

"If the loonie had a stocking hanging on the chimney, it would probably find coal in it," said Brad Schruder, director of corporate sales and structuring at BMO Capital Markets.

"Between now and the end of the year, you are probably going to see the Canadian dollar lose anywhere from another 2 cents to 2-1/2 cents in value against the U.S. dollar," he added.

Chances of an interest rate hike in January have dropped to less than 30 percent from 41 percent before Thursday's decision to hold steady, the overnight index swaps market indicated .

The Bank of Canada raised rates in July for the first time in seven years, and then again in September. Its benchmark interest rate is 1 percent.

At 4 p.m. EST (2100 GMT), the Canadian dollar was trading at C$1.2851 to the greenback, or 77.81 U.S. cents, down 0.5 percent.

The currency, which touched its weakest since Friday at C$1.2868, lost ground despite firm domestic data and a higher price of oil, one of Canada's major exports.

U.S. crude futures settled 1.3 percent higher at $56.69 a barrel due to a threatened strike in Nigeria. [O/R]

The value of Canadian building permits increased 3.5 percent in October from September, more than economists had expected.

Still, the Canadian dollar is likely to strengthen over the coming year, a Reuters poll showed, on assumptions that uncertainty over trade lifts and a stronger economy boosting inflation will prompt the Bank of Canada to resume raising rates.

The U.S. dollar (.DXY) reached a two-week high against a basket of currencies on optimism that the United States will push through a tax overhaul.

Canadian government bond prices were little changed across the yield curve, with the two-year down 1 Canadian cent to yield 1.495 percent and the 10-year rising 2 Canadian cents to yield 1.855 percent.

The gap between Canada's 10-year yield and its U.S. equivalent widened by 3.4 basis points to a spread of -50.7 basis points.

(Reporting by Fergal Smith, editing by G Crosse)