CANADA FX DEBT-Canadian dollar falls as inflation data fuels rate cut bets

By Fergal Smith

TORONTO, Aug 19 (Reuters) - The Canadian dollar hit its lowest in almost three weeks against its U.S. counterpart on Tuesday as oil prices fell and cooler domestic inflation data raised expectations the Bank of Canada would cut interest rates in the coming months.

The loonie CAD= was trading 0.4% lower at 1.3855 per U.S. dollar, or 72.18 U.S. cents, after touching its weakest intraday level since August 1 at 1.3860.

Canada's annual inflation rate eased to 1.7% in July from 1.9% in the prior month, helped by lower gasoline prices, while 3-month annualized measures of underlying inflation that the BoC closely tracks decelerated to 2.4% from 3.4%, according to Reuters calculations.

"I think the more impactful bit of the report is that deceleration in three-month rates of core CPI," said Robert Both, senior Canada macro strategist at TD Securities. "So even with CPI-trim and median still running near 3% year-over-year, the bank has put a little more weight on those three-month core rates."

Investors see a 39% chance of a rate cut from the Canadian central bank at the next policy decision on September 17, up from 31% before the data, and have leaned heavily toward an easing of policy by October. 0#CADIRPR

The price of oil CLc1, one of Canada's major exports, was down 1.1% at $62.71 a barrel as traders assessed the possibility that talks between Russia, Ukraine and the U.S. to end the war in Ukraine could lead to the lifting of sanctions on Russian crude, raising supply.

One possible bright spot for the loonie was the ending of a strike by flight attendants at Air Canada, the nation's largest carrier, which could have weighed on the domestic economy.

Canadian bond yields moved lower across the curve, with the 10-year CA10YT=RR down 4.4 basis points at 3.446%.