By Fergal Smith

TORONTO, July 21 (Reuters) - The Canadian dollar weakened to a one-week low against the greenback on Tuesday as the threat of additional U.S. tariffs on Canadian goods led to investors reducing bets on Bank of Canada interest rate hikes this year.

The loonie CAD= was trading 0.2% lower at 1.4104 per U.S. dollar, or 70.90 U.S. cents, marking its weakest level since last Tuesday.

U.S. President Donald Trump unveiled 50% tariffs on a wide range of imports from Canada on Monday in response to what the U.S. administration called its discriminatory treatment of American-made cars, alcohol and dairy goods. The new levies are set to take effect on August 19.

"The Canadian dollar’s move lower looks less like a clean tariff-premium story and more like a rates story for now," said Kevin Ford, FX & macro strategist at Convera. "The 30-day window on the latest U.S. tariff threat gives markets reason to treat this as another negotiating tactic rather than an immediate break in the trade relationship."

The swap market was pricing in 13 basis points of interest rate hikes from the Bank of Canada by December. That's down from 16.5 basis points before the tariff announcement and down from 18 basis points in advance of Monday's softer-than-expected Canadian inflation data.

"CAD is still being traded less as a standalone trade story and more as a macro expression of rates, growth divergence, and policy uncertainty," Ford said.

The U.S. dollar =USD rose against a basket of major currencies as the latest round of attacks in the Middle East sent oil prices higher and stoked concerns about persistent inflation. U.S. crude oil futures CLc1 were trading 2.5% higher at $85.31 a barrel.

Canadian government bond yields moved lower across the curve. The 2-year CA2YT=RR was down 2.7 basis points at 2.812%, while it fell 6.9 basis points further below the equivalent U.S. rate to a gap of 144.5 basis points, which is the widest gap since May 2025.