TORONTO, July 31 (Reuters) - The Canadian dollar weakened to a two-month low against its U.S. counterpart on Thursday, pressured by diverging monetary policy expectations and signs that a trade deal between the U.S. and Canada is growing less likely.
The loonie was trading 0.1% lower at 1.3845 per U.S. dollar, or 72.23 U.S. cents, after touching its weakest intraday level since May 29 at 1.3856. For the month, the loonie was down 1.7%.
"The Canadian dollar is suffering as policy rate expectations against the U.S. diverge and as traders brace for more negativity from south of the border," Karl Schamotta, chief market strategist at Corpay, said in a note. "Our short-term call for a touch of the 1.39 level remains intact."
The Canadian two-year yield was trading roughly 117 basis points below its U.S. equivalent, the widest gap in three weeks, after the Bank of Canada on Wednesday opened the door to an interest rate cut in the coming months and comments by Federal Reserve Chair Jerome Powell undercut confidence that U.S. borrowing costs would begin to fall in September.
U.S. President Donald Trump has intensified his trade war with Canada ahead of his August 1 deadline for a tariff agreement, saying it would be "very hard" to make a deal with Canada after it gave its support to Palestinian statehood.
Canada sends about 75% of its exports to the United States. Its gross domestic product decreased by 0.1% in May on a monthly basis, matching expectations, weighed by contraction in the retail trade sector.
Preliminary estimates showed the economy regaining the lost ground in June and posting annualized growth of 0.1% for the second quarter.
The price of oil , one of Canada's major exports, settled 1.1% lower at $69.26 a barrel, while Canadian bond yields moved lower across the curve.
The 10-year was down 4.1 basis points at 3.448%, its lowest level since July 11.
Reporting by Fergal Smith Editing by Marguerita Choy
