CANADA FX DEBT-Canadian dollar falls as investors eye wider interest rate gap

By Fergal Smith

TORONTO, Jan 22 (Reuters) - The Canadian dollar weakened against its U.S. counterpart on Wednesday as investors braced for the Bank of Canada to cut its benchmark interest rate further below the Federal Reserve's key rate at a policy decision next week.

The loonie CAD= was trading 0.3% lower at 1.4360 per U.S. dollar, or 69.64 U.S. cents, after trading in a range of 1.4302 to 1.4391.

On Tuesday, the currency touched its weakest intraday level in nearly five years at 1.4515 after U.S. President Donald Trump said he was thinking about imposing a 25% tariff on goods from Canada on Feb. 1.

"Today's market activity doesn't appear to be tariff-driven," said Tony Valente, senior FX dealer at AscendantFX.

"Instead, it seems to reflect growing recognition of monetary policy divergence. Yesterday's lower inflation reading in Canada paves the way for the Bank of Canada to cut rates at next week's policy meeting, while the Federal Reserve is likely to hold steady."

Data on Tuesday showed that Canadian inflation slowed to an annual rate of 1.8% in December. Investors see a roughly 80% chance that the Bank of Canada will cut by 25 basis points to 3% on Jan. 29.

That would leave the rate 150 basis points below the upper end of the Federal Reserve's 4.25%-4.50% range for its policy rate, which is an historically wide gap. 0#BOCWATCH0#FEDWATCH

Canadian retail sales data for November, due on Thursday, could offer clues on the strength of the domestic economy. Economists forecast a month-over-month gain of 0.2%.

The U.S. dollar .DXY edged higher against a basket of major currencies, while the price of oil, one of Canada's major exports, fell to a 12-day low.

The Canadian 10-year bond yield CA10YT=RR was up 4.1 basis points at 3.304%, after touching its lowest level since Jan. 3 at 3.218% during Tuesday's session.

(Reporting by Fergal Smith in Toronto; Editing by Nia Williams)

((fergal.smith@thomsonreuters.com; +1 647 480 7446;))