CANADA FX DEBT-Canadian dollar weakens as investors unravel central bank rate signals

By Fergal Smith

TORONTO, Sept 18 (Reuters) - The Canadian dollar weakened against its U.S. counterpart on Thursday, pressured by potentially contrasting messages the day before from the Bank of Canada and the Federal Reserve when both central banks cut interest rates.

The loonie CAD= was trading 0.2% lower at 1.3805 per U.S. dollar, or 72.44 U.S. cents, after moving in a range of 1.3766 to 1.3809.

"Following the double header of central bank decisions, the Canadian dollar’s move back above 1.38 reflects a divergence in tone," said Kevin Ford, FX & macro strategist at Convera.

"A dovish Bank of Canada, despite offering no forward guidance, and markets reading Fed Chair (Jerome) Powell’s remarks as unexpectedly hawkish have left the loonie vulnerable to further U.S. dollar strength."

On Wednesday, the Bank of Canada reduced its key interest rate to a three-year low of 2.5%, the first cut since March, and said it would be ready to cut again if risks to the economy increased in the coming months.

The Fed signaled little urgency to lower borrowing costs quickly as it eased for the first time this year, which helped the U.S. dollar recoup some recent declines against a basket of major currencies.

Adding to headwinds for the loonie, the price of oil was down 0.9% at $63.48 a barrel. Oil is one of Canada's major exports.

Canadian Prime Minister Mark Carney was due to arrive in Mexico City for a two-day mission designed to improve recently strained ties and seek a common front in crucial trade talks with the United States.

The Canadian 10-year yield CA10YT=RR eased half a basis point to 3.186%, while it fell 3.4 basis points further below the equivalent U.S. yield to a spread of 91.9 basis points. It was the widest gap in over two months.