* Canadian dollar at C$1.2800, or 78.13 U.S. cents
* Canada's annual inflation rate falls to 1.4 percent in October
* Loonie touches its weakest since Nov. 7 at C$1.2815
* Bond prices higher across the yield curve
By Fergal Smith
TORONTO, Nov 17 (Reuters) - The Canadian dollar weakened to a 10-day low against its U.S. counterpart on Friday after data showing subdued domestic inflation reduced expectations for further interest rate hikes by the Bank of Canada through the first quarter of next year.
Canada's annual inflation rate decreased to 1.4 percent last month from 1.6 percent in September, in line with economists' forecasts, while a recent uptrend in the Bank of Canada's measures of core inflation stalled. report was slightly "dovish" due to the potential for those core measures to plateau in the near term, said Derek Holt, head of capital markets economics at Scotiabank.
Chances of another rate hike by the Bank of Canada by March slipped to about 60 percent from 70 percent before the data, the overnight index swaps market indicated. BOCWATCH
The central bank raised rates in July and September for the first time in seven years but has not done so since because of worries about a number of uncertainties for the outlook of the economy, including renegotiation of the North American Free Trade Agreement.
The fifth round of NAFTA talks begin on Friday in Mexico and continue through Tuesday.
Canada is open to a Mexican proposal to review the trade agreement every five years instead of terminating it automatically if it is not renegotiated, as the United States has demanded, two government sources said on Thursday. 9:25 a.m. ET (1425 GMT), the Canadian dollar CAD=D4 was down 0.3 percent at C$1.2800 to the greenback, or 78.13 U.S. cents. It touched its weakest since Nov. 7 at C$1.2815.
The loonie lost ground despite an increase in the price of oil, one of Canada's major exports. U.S. crude CLc1 was up 1.34 percent at $55.88 a barrel. Canadian dollar is unlikely to recapture its tight link with the price of oil, which is far removed from levels needed to affect investment in Canada's energy sector, economists and strategists said. separate data, lending to Canadian small businesses cooled in September after climbing earlier in the year. government bond prices were higher across the yield curve, with the two-year CA2YT=RR up 6 Canadian cents to yield 1.449 percent and the 10-year CA10YT=RR climbing 27 Canadian cents to yield 1.941 percent.
The gap between Canada's 2-year yield and its U.S. equivalent widened by 3.6 basis points to a spread of -26.8 basis points.