Canadian dollar edges lower as Wall Street slides

By Fergal Smith

TORONTO (Reuters) - The Canadian dollar weakened against its U.S. counterpart on Tuesday as stock markets fell, but the move was limited ahead of a Bank of Canada interest rate decision this week.

The loonie was trading 0.1% lower at 1.3585 to the U.S. dollar, or 73.61 U.S. cents, after trading in a range of 1.3556 to 1.3505.

The currency has weakened 2.5% since the beginning of the year as the U.S. dollar notched broad-based gains against a basket of major currencies.

"I find that the Canadian dollar is highly correlated to the S&P 500 and U.S. stocks are getting hit pretty hard today," Marc Chandler, chief market strategist at Bannockburn Global Forex LLC, said.

Wall Street's major indexes fell, with weakness in megacap growth stocks such as Apple and Tesla weighing on the Nasdaq, while the price of oil, one of Canada's major exports, settled 0.8% lower at $78.15 a barrel.

The Canadian services sector remained in contraction in February but the pace of decline eased as the prospect of interest rate cuts boosted firms' optimism in the outlook for the economy, S&P Global Canada services PMI data showed.

Investors expect the BoC to leave its benchmark interest rate on hold at a 22-year high of 5% on Wednesday but to then begin an easing cycle in April or June.

Still, the Canadian central bank is likely next month to raise its estimate of the neutral interest rate, a key signpost for the level that rates are headed over time, analysts say.

Canadian government bond yields moved lower across the curve, tracking moves in U.S. Treasuries. The 10-year was down 8.3 basis points at 3.367% after touching its lowest intraday level since Feb. 2 at 3.337%.

(Reporting by Fergal Smith; Editing by Alison Williams)