CANADA FX DEBT-Canadian dollar extends steep March decline, nears 1.40 per U.S. dollar

* Canadian dollar falls 0.2% against the greenback

* Touches its weakest since December 4 at 1.3966

* GDP rises 0.1% in January

* Bond yields ease across steeper curve

By Fergal Smith

TORONTO, March 31 (Reuters) - The Canadian dollar weakened to a near four-month low against its U.S. counterpart on Tuesday as recent safe-haven demand for the U.S. dollar offset data that showed surprising growth in Canada's economy at the start of the year.

The loonie was trading 0.2% lower at 1.3950 per U.S. dollar, or 71.68 U.S. cents, after touching its weakest intraday level since December 4 at 1.3966. For the month, the currency was down 2.2%, which would be its biggest monthly decline since December 2024.

"The geopolitical shock out of the Middle East has lifted energy prices, but more importantly it has triggered a classic flight to quality, where the USD remains the market's bunker of choice," said Tony Valente, a senior FX dealer at AscendantFX. The U.S. dollar fell against a basket of major currencies on a report of potential de-escalation in the U.S.-Israeli war on Iran, though it remained on track for its best quarter since Q3 2024.

"At the same time, (interest) rate differentials are increasingly working against the loonie," Valente said.

"Unless the Bank of Canada signals a more hawkish stance to push back against this divergence, the path of least resistance for USD-CAD remains higher, with the 1.40 psychological level now emerging as the next key target." Earlier this month, the BoC left its benchmark interest rate on hold at 2.25% and said it was too early to assess the effect of the war. Canadian GDP rose by 0.1% in January on a monthly basis, eclipsing estimates for a flat reading. An advance estimate showed the economy expanding by a further 0.2% in February. Money markets have priced in 42 basis points of tightening from the BoC this year, down from the 70 basis points expected just a few days ago. Canadian bond yields moved lower across a steeper curve. The 2-year was down 6.8 basis points at 2.819%, after earlier touching its lowest level since March 19 at 2.803%. (Reporting by Fergal Smith, editing by Deepa Babington)