(Adds details on central bank decision, currency performance and oil inventories; updates prices)
* Canadian dollar at C$1.2801, or 78.12 U.S. cents
* Loonie touches its weakest since July 12 at C$1.2816
* Bond prices rise across a steeper yield curve
* Canadian yields fall further below U.S. yields
TORONTO, Oct 25 (Reuters) - The Canadian dollar tumbled to a more than three-month low against its U.S. counterpart on Wednesday, after a cautious Bank of Canada dampened expectations for another interest rate hike this year. The Bank of Canada held its policy rate steady at 1 percent, as expected, even as it said the economy was running at or near full capacity, signaling it was willing to let the economy run a little bit hot amid uncertainty over renegotiation of the North American Free Trade Agreement. "With the kind of language they used ... it makes you question whether they will be ready to move in December," said Jimmy Jean, senior economist at Desjardins Capital Markets. Perceived chances of another hike by the end of the year fell to less than 30 percent from 37 percent before the rate decision, the overnight index swaps market showed. The central bank had hiked in July and September, the first rate increases in nearly seven years, after rapid acceleration in Canada's economy in the first half of the year.
At 4 p.m. EDT (2000 GMT), the Canadian dollar was
trading at C$1.2801 to the greenback, or 78.12 U.S. cents, down 1 percent. The currency's strongest level of the session was C$1.2630, while it touched its weakest since July 12 at C$1.2816. It has lost 5.8 percent since posting a more than 2-year high in early September. The price of oil, one of Canada's major exports, fell after a surprising increase in U.S. crude inventories.
U.S. crude prices settled 0.6 percent lower at $52.18
a barrel. Canadian government bond prices were higher across a steeper
yield curve, with the two-year up 5.5 Canadian cents to yield 1.466 percent and the 10-year rising 18
Canadian cents to yield 2.043 percent. Canada's 2-year yield fell 5.4 basis points further below its U.S. equivalent to a spread of -13.7 basis points, after U.S. data pointing to strong business spending helped underpin U.S. Treasury yields.
(Reporting by Fergal Smith; Editing by Meredith Mazzilli and James Dalgleish)