C$ pares weekly decline as interest rate differentials narrow

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Canada-U.S. 2-year spread narrows by 11 basis points

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Price of U.S. oil tumbles 3.8%

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Ten-year yield hits 15-month low at 2.947%

(Updates market pricing)

By Fergal Smith

TORONTO, Aug 2 (Reuters) - The Canadian dollar edged higher against its American counterpart on Friday as a slowdown in U.S. jobs growth helped reduce unfavorable interest rate differentials for the loonie, offsetting a sharp drop in oil prices.

Canada's currency was trading 0.1% higher at 1.3860 per U.S. dollar, or 72.15 U.S. cents, after touching on Thursday its weakest intraday level since November at 1.3889. The loonie was down 0.2% on the week, its third straight weekly decline.

The U.S. unemployment rate jumped to near a three-year high of 4.3% in July amid a significant slowdown in hiring, potentially making the economy vulnerable to a recession."

"Rate differentials are narrowing in the Canadian dollar's favour as the Federal Reserve is seen joining the Bank of Canada in an aggressive easing cycle," said Karl Schamotta, chief market strategist at Corpay.

The gap between U.S. and Canadian 2-year yields narrowed by 8 basis points to 72 basis points in favor of the U.S. rate as traders piled into bets that the Federal Reserve would deliver a larger-than-normal half-percentage-point interest rate cut in September, when it is expected to begin an easing cycle.

The Bank of Canada has already cut rates twice since June, moving in 25-basis-point increments. Investors expect another cut in September, while the chances that the BoC would step up the easing pace to 50 basis points climbed to 26%, swaps market data showed.

The U.S. dollar weakened against a basket of major currencies and stocks on Wall Street tumbled, while the price of oil CLc1>, one of Canada's major exports, settled 3.7% lower at $73.52 a barrel as the U.S. data clouded the outlook for crude demand.

The Canadian 10-year yield fell 11 basis points to 2.998% after earlier touching its lowest level since May 2023 at 2.947%. (Reporting by Fergal Smith Editing by Marguerita Choy and Paul Simao)