By Fergal Smith

TORONTO (Reuters) – The Canadian dollar weakened against its U.S. counterpart on Thursday as investors weighed the risk of a global economic slowdown and preliminary national data showed a drop in factory sales in May.

The loonie was trading down 0.3% at 1.2985 against the greenback, or 77.01 US cents, after hitting its lowest level since Monday at 1.3017.

“With recession fears spooking markets more broadly, commodity prices were under pressure today which also saw the Canadian dollar pull back,” said Royce Mendes, director and chief macro strategist. at Desjardins.

Data from purchasing managers showed a loss of economic momentum in some major European economies. Investors fear that interest rate hikes to curb decades-high inflation could tip economies into recession.

The price of oil, one of Canada‘s top exports, fell 1.8% to $104.27 a barrel as investors weighed the potential impact of slowing economic growth on demand fuel.

Preliminary national economic estimates for May were mixed, with factory sales down 2.5% from April, but wholesale trade up 2%.

Still, money markets expect the Bank of Canada to raise interest rates by three-quarters of a percentage point next month after data on Wednesday showed inflation hit its highest level in almost four decades.

The central bank has come under a rare attack from critics after it misjudged inflation and locked itself into rigid forward guidance that prevented it from reacting quickly as prices soared and the he Canadian economy was beginning to overheat.

Yields on Canadian government bonds declined across the curve, following the performance of US Treasuries. The 10-year hit its lowest since June 10 at 3.224% before rising to 3.294%, down 12.7 basis points on the day.

The Bank of Canada announced the bond auction schedule for the next quarter, including four 10-year bond auctions.

(Reporting by Fergal Smith; Editing by Mark Heinrich)