TORONTO, May 23 (Reuters) - The Canadian dollar weakened to a two-week low against its U.S. counterpart on Thursday as oil prices fell and investors eyed potential policy divergence between the Bank of Canada and the Federal Reserve.
The loonie was trading 0.3% lower at 1.3730 to the U.S. dollar, or 72.83 U.S. cents, its weakest level since May 9.
"USD-CAD has been moving higher from markets pricing in a greater probability of Fed and BoC divergence with slightly dovish details in the Canadian inflation report and stronger than expected US PMIs today," said Jayati Bharadwaj, global FX strategist at TD Securities.
Businesses across the globe broadly enjoyed an improved performance this month with activity picking up in the United States and across parts of Asia and Europe, surveys showed, giving central banks, including the Fed, room to potentially defer cutting interest rates.
On Tuesday, Canadian data showed the annual rate of inflation falling to a three-year low of 2.7%, leading to increased bets that the BoC would begin an interest rate cutting cycle at its next policy announcement on June 5.
The BoC would be willing to cut rates three times ahead of the Fed's first move before a declining currency threatens to endanger the inflation outlook, the median estimate of seven analysts in a straw poll showed.
"Oil prices have been moving lower and equities have been flat which also does not bode well for the Canadian dollar," Bharadwaj said.
The price of oil, one of Canada's major exports, fell for the fourth straight session, as the prospect of higher-for-longer U.S. interest rates raised worries around demand growth. U.S. crude oil futures were down 1.1% at $76.70 a barrel.
Canadian bond yields moved higher across the curve, tracking the move in U.S. Treasuries. The 10-year was up 2.8 basis points at 3.628%.
Reporting by Fergal Smith;
