CANADA FX DEBT-Canadian dollar hits a near three-week low on wider yield spreads

By Fergal Smith

TORONTO, Nov 3 (Reuters) - The Canadian dollar weakened to a near three-week low against its U.S. counterpart on Monday as recent widening in the gap between Canadian and U.S. short-term yields weighed on the loonie.

The loonie CAD= was trading 0.3% lower at 1.4055 per U.S. dollar, or 71.15 U.S. cents, after touching its weakest intraday level since October 14 at 1.4075.

"The main driving force we see leading USD-CAD at the moment is the 2-year yield spread," said Amo Sahota, director at Klarity FX in San Francisco. "It remains the strongest correlation factor in our USD-CAD fair value model."

The Canadian 2-year yield was trading 119 basis points below the equivalent U.S. rate, compared to a gap of 92 basis points in late August. Investors tend to favor the higher-yielding currency.

Last week, the Bank of Canada cut its benchmark interest rate to a three-year low of 2.25% to support the economy which has been badly hampered by the U.S.-led trade war.

The downturn in Canada's manufacturing sector eased in October as output and new orders declined at a slower pace. The S&P Global Canada Manufacturing Purchasing Managers' Index rose to 49.6 last month from 47.7 in September, posting its highest level since January.

The U.S. dollar .DXY extended its recent gains against a basket of major currencies on doubts about prospects of another Federal Reserve rate cut this year.

The price of oil CLc1, one of Canada's major exports, was down 0.2% at $60.84 a barrel as the market balanced the latest OPEC+ supply increase with the group's plans to pause output increases in the first quarter of 2026.

Canadian bond yields moved higher across the curve, with the 10-year CA10YT=RR up 3.1 basis points at 3.152%.

Analysts expect Canada's budget, due on Tuesday, to show the fiscal deficit widening.