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Canadian dollar hits 5-month low as Chinese data spooks investors

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 Tuesday as investors assessed weak Chinese data and awaited a Bank of Canada interest rate decision, but higher oil prices capped the currency's decline.

The loonie was trading 0.3% lower at 1.3636 to the greenback, or 73.34 U.S. cents, after touching its weakest level since March 28 at 1.3669.

"The weak Chinese services PMI, I think that was the big reason for the drop overnight," said Erik Bregar, director, FX & precious metals risk management at Silver Gold Bull. "New lows this morning but oil has brought it back."

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China's services activity expanded at the slowest pace in eight months in August as weak demand continued to dog the world's second-largest economy.

Jitters over global growth, particularly in China, led to investors flocking to the safe-haven U.S. dollar. It climbed against a basket of major currencies, adding to its gains in recent weeks as bond yields climbed.

"I think we are going to have to see something much more constructive on the commodity front, on the U.S. rates front before CAD can turn around," Bregar said.

The price of oil settled 1.3% higher at $86.69 a barrel after Saudi Arabia and Russia announced a fresh extension to their voluntary supply cuts.

Investors have raised bets that the Canadian central bank will hold its key interest rate steady at 5.00% on Wednesday after recent data for the second quarter showed a surprise contraction in Canada's economy.

A majority of economists in a Reuters poll expect the BoC to move to the sidelines..

Canadian government bond yields rose across the curve, tracking moves in U.S. Treasuries. The 10-year was up 12.6 basis points at 3.695%.

(Reporting by Fergal Smith, Editing by Nick Zieminski)