CANADA FX DEBT-Canadian dollar hits 11-day low as cooler inflation boosts rate cut bets

By Fergal Smith

TORONTO, Feb 17 (Reuters) - The Canadian dollar weakened against its U.S. counterpart on Tuesday, as the greenback posted broad-based gains and domestic inflation data raised prospects the Bank of Canada would resume its interest rate cutting campaign.

The loonie CAD= was trading 0.2% lower at 1.3655 per U.S. dollar, or 73.23 U.S. cents, after touching its weakest intraday level since February 6 at 1.3692.

Canada's annual inflation rate slowed to 2.3% in January from 2.4% in the previous month as a big drop in gasoline prices helped cushion the impact of higher food and clothing prices. Analysts had expected inflation to hold steady at 2.4%.

"The Bank has made it abundantly clear that the bar to cut rates again is quite high, and it continues to stress that monetary policy cannot fix supply shocks," Douglas Porter, chief economist at BMO Capital Markets, said in a note.

"Even so, if inflation continues to decelerate, the Bank could be in position to support the economy should growth truly struggle as it undergoes a structural shift."

Canada, seeking to cut its reliance on the U.S. arms industry, wants to dramatically increase the amount of weapons it buys from domestic firms, according to a defense strategy document.

Investors see a roughly 35% chance the BoC eases policy this year after the central bank left its benchmark rate on hold at 2.25% since October. Earlier this month, the market was leaning toward the next move being a hike. 0#CADIRPR

The safe-haven U.S. dollar .DXY rose against a basket of major currencies as AI-related jitters crimped risk appetite.

The price of oil CLc1, one of Canada's major exports, was trading 1.3% lower at $62.11 a barrel as concerns eased about an escalation in tensions between the U.S. and Iran.

Canadian bond yields moved lower across a flatter curve. The 10-year CA10YT=RR was down 3.6 basis points at 3.223%, after earlier touching its lowest since December 1 at 3.204%.