TORONTO, July 3 (Reuters) - Canada's dollar will strengthen less than previously expected over the coming year as uncertain negotiations to revise the U.S.-Mexico-Canada Agreement (USMCA) weigh on the domestic economy, reducing the prospects of interest rate hikes from the Bank of Canada, a Reuters poll showed.
The median forecast of 39 foreign exchange analysts in a June 26 to July 1 poll expected the Canadian dollar to gain 1.3% to 1.40 per U.S. dollar, or 71.43 U.S. cents, in three months, which is weaker than the 1.37 per U.S. dollar forecast in a survey last month.
In 12 months, the loonie was expected to strengthen 4.3% to 1.36, compared with 1.34 in the previous forecast.
The Trump administration on Wednesday declined to extend USMCA, known as CUSMA in Canada, starting a decade-long clock to wind down the trade deal as it seeks changes to try to reshore manufacturing jobs and reduce U.S. trade deficits with its North American neighbors.
Canada sends about 70% of its exports to the U.S., including steel, aluminum, autos and lumber, which have been hit by U.S. tariffs. The most recent quarterly GDP data showed the economy was slipping into a technical recession.
"The loonie has weakened considerably against the greenback over the past few weeks given shifting rate expectations vis-à-vis the U.S.," said Bradley Saunders, North America economist at Capital Economics.
"We expect that trend to continue, as CUSMA-related uncertainty holds back growth - and therefore rate hikes - in Canada this year, while sticky core inflation and solid GDP growth push the Fed to reverse some of their earlier rate cuts."
Speculators have raised their bearish bets on the Canadian dollar to the highest level since December.
Last week, the currency touched a 14-month low at 1.4248, while Canada's 2-year yield fell more than 140 basis points below the U.S. equivalent, marking the widest gap since May last year.
The Bank of Canada has said it sees limited evidence that higher energy prices are fueling broad-based inflation. Swap markets have priced in around 10 basis points of tightening this year from the central bank, down from about 60 basis points in May.
Federal Reserve Chairman Kevin Warsh said on Wednesday he will stick firmly to the U.S. central bank's 2% inflation target and "disappoint" anyone who expects loose monetary policy.
A separate Reuters poll on the U.S. dollar showed the weaker dollar view is facing resistance from a growing camp predicting smaller declines - or even gains in the near term.
(Other stories from the July Reuters foreign exchange poll)
Reporting by Fergal Smith; Polling by Mumal Rathore and Indradip Ghosh; Editing by Thomas Derpinghaus
