CANADA FX DEBT-Canadian dollar dips as BoC rate cut adds to interest rate divergence

By Fergal Smith

TORONTO, Jan 29 (Reuters) - The Canadian dollar weakened against the greenback on Wednesday as the Bank of Canada's latest interest rate cut helped widen the gap between Canadian and U.S. bond yields, but the decline was limited ahead of a Federal Reserve policy decision.

The loonie CAD= was trading 0.2% lower at 1.4420 per U.S. dollar, or 69.35 U.S. cents, after trading in a range of 1.4393 to 1.4471.

The BoC reduced its key policy rate by 25 basis points to 3%, cut growth forecasts and warned Canadians that a tariff war triggered by the United States could cause major economic damage.

"The market is still looking for more rate cuts from the Bank of Canada," said Amo Sahota, director at Klarity FX in San Francisco. "If we do get a hit from tariffs that obviously would put downward pressure on growth."

Investors see a 41% chance the BoC will cut again in March and are pricing in roughly 40 basis points of further easing in total by the end of 2025. 0#BOCWATCH

The Canadian 2-year yield CA2YT=RR eased 4.2 basis points to 2.800%. It was trading 5.5 basis points further below the equivalent U.S. rate to a gap of roughly 141 basis points.

That was the largest gap since October 1997.

"The loonie, while softer, it's not been an explosive day so far," Sahota said. "The market may just be waiting for the Federal Reserve meeting."

The Fed is expected to hold interest rates steady when it releases its policy decision at 2 p.m. EST (1900 GMT) as it awaits further inflation and jobs data as well as more clarity on the economic impact of President Donald Trump's policies.

The price of oil, one of Canada's major exports, was trading 1.6% lower at $72.56 a barrel on a rise in U.S. crude stockpiles.