CANADA FX DEBT-Canadian dollar edges lower as BoC cuts rates on tariff risk

Updates market prices and adds details on activity

By Fergal Smith

TORONTO, Jan 29 (Reuters) - The Canadian dollar weakened against the greenback on Wednesday as the Bank of Canada cut interest rates to support the economy ahead of expected U.S. trade tariffs, helping to widen the gap between Canadian and U.S. bond yields.

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 4.1 basis points to 2.801%. It was trading 5.6 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.

U.S. Commerce secretary nominee Howard Lutnick said that Canada and Mexico can avoid looming U.S. tariffs if they act swiftly to close their borders to fentanyl.

The U.S. dollar was firmer against a basket of major currencies after the Federal Reserve left interest rates unchanged as widely expected but gave scant clues about further reductions in borrowing costs this year.

The price of oil, one of Canada's major exports, settled 1.6% lower at $72.62 a barrel after U.S. crude stockpiles rose more than expected last week.