(Adds details and updates prices)
* Canadian dollar at C$1.2897, or 77.54 U.S. cents
* Loonie matches Monday's low as weakest in 8 months
* Bond prices mixed across the yield curve
* Bank of Canada leaves benchmark rate at 1.25 percent
By Fergal Smith
TORONTO, March 7 (Reuters) - The Canadian dollar weakenedagainst the greenback on Wednesday as the Bank of Canada worriedabout trade policy developments, but the loonie pared its loseson prospects of an exemption from U.S. metals tariffs.
The Bank of Canada said that trade policy is an "importantand growing source of uncertainty for the global and Canadianoutlooks," as it left its benchmark interest rate unchanged at1.25 percent. sends 75 percent of its exports to the United States.Its economy could be hurt by an uncertain outlook for the NorthAmerican Free Trade Agreement and a potential global trade war.
The resignation of top U.S. economic adviser Gary Cohn couldgive free trade skeptics the upper hand in the White House. Butthe White House said Canada and Mexico, and possibly othercountries, may be exempted from planned U.S. import tariffs onsteel and aluminum on the basis of national security. real big issue is you still probably have another ratehike you have to price out for this year," said Mark McCormick (NYSE:MKC),North American head of FX Strategy at TD Securities. "It hasbeen our view for the last month or so that two more hikespriced in this year is pretty aggressive."
The Bank of Canada has raised its benchmark interest ratethree times since July. The amount of further tighteninganticipated this year by money markets slipped to 46 basispoints from 50 on Tuesday. BOCWATCH CA/POLL
Canada's trade deficit narrowed more than expected to C$1.91billion in January as imports pulled back from a record high,but exports tumbled by the most in six months. price of oil, one of Canada's major exports, fell afterU.S. government data showed an increase in inventories. U.S.crude oil futures CLc1 settled 2.3 percent lower at $61.15 abarrel.
At 4 p.m. EST (2100 GMT), the Canadian dollar CAD=D4 wastrading 0.2 percent lower at C$1.2897 to the greenback, or 77.54U.S. cents. The currency matched Monday's low at C$1.3002, whichwas its weakest since July 5.
Still, the Canadian dollar is forecast to rally over thecoming year, a Reuters poll showed, as global economic strengthand a broadly weaker greenback offset investor fears of a tradewar. government bond prices were mixed across the yieldcurve, with the 10-year CA10YT=RR falling 5 Canadian cents toyield 2.239 percent.
Canada's employment report for February is due on Friday.