CANADA FX DEBT-C$ pares losses on prospects of U.S. tariffs exemption

(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

TORONTO, March 7 (Reuters) - The Canadian dollar weakened against the greenback on Wednesday as the Bank of Canada worried about trade policy developments, but the loonie pared its loses on prospects of an exemption from U.S. metals tariffs. The Bank of Canada said that trade policy is an "important and growing source of uncertainty for the global and Canadian outlooks," as it left its benchmark interest rate unchanged at 1.25 percent. Canada sends 75 percent of its exports to the United States. Its economy could be hurt by an uncertain outlook for the North American Free Trade Agreement and a potential global trade war. The resignation of top U.S. economic adviser Gary Cohn could give free trade skeptics the upper hand in the White House. But the White House said Canada and Mexico, and possibly other countries, may be exempted from planned U.S. import tariffs on steel and aluminum on the basis of national security.

"The real big issue is you still probably have another rate hike you have to price out for this year," said Mark McCormick, North American head of FX Strategy at TD Securities. "It has been our view for the last month or so that two more hikes priced in this year is pretty aggressive." The Bank of Canada has raised its benchmark interest rate three times since July. The amount of further tightening anticipated this year by money markets slipped to 46 basis points from 50 on Tuesday. Canada's trade deficit narrowed more than expected to C$1.91 billion in January as imports pulled back from a record high, but exports tumbled by the most in six months. The price of oil, one of Canada's major exports, fell after U.S. government data showed an increase in inventories. U.S.

crude oil futures settled 2.3 percent lower at $61.15 a


At 4 p.m. EST (2100 GMT), the Canadian dollar was

trading 0.2 percent lower at C$1.2897 to the greenback, or 77.54 U.S. cents. The currency matched Monday's low at C$1.3002, which was its weakest since July 5. Still, the Canadian dollar is forecast to rally over the coming year, a Reuters poll showed, as global economic strength and a broadly weaker greenback offset investor fears of a trade war. Canadian government bond prices were mixed across the yield

curve, with the 10-year falling 5 Canadian cents to

yield 2.239 percent. Canada's employment report for February is due on Friday.

(Reporting by Fergal Smith Editing by Susan Thomas and James Dalgleish)