The Canadian dollar weakened against its U.S. counterpart on Wednesday as a drop in oil prices offset data showing strength in the domestic economy.

Canada's gross domestic product grew at an annualized 3.7-per-cent pace, slightly below economists' expectations for 3.9 per cent, although growth in both the third and fourth quarters of 2016 was revised upward.

The economy also appeared to have solid momentum heading into the second quarter, with growth rising by a better-than-expected 0.5 per cent in March.

"If we continue to get growth numbers like this ... it's going to be tougher for the Bank of Canada to avoid rate hikes at some point in the distance," said Derek Holt, head of capital markets economics at Scotiabank.

The central bank last week kept interest rates on hold at 0.5 per cent, but struck a more upbeat tone than investors had expected.

Chances of a Bank of Canada rate hike this year have increased to 30 per cent from roughly 1-in-10 before the interest rate decision, data from the overnight index swaps market showed.

U.S. crude oil futures settled 2.7-per-cent lower at $48.32 a barrel despite Organization of the Petroleum Exporting Countries-led output cuts to reduce a global glut. Output from OPEC rose in May, the first monthly increase this year, a Reuters survey found.

Oil is one of Canada's major exports. Weakening in the commodity could push speculators to add to bearish bets on the Canadian dollar, said Hendrix Vachon, senior economist at Desjardins.

Speculators increased net short positions in the Canadian dollar to a record high as of May 23, recent data from the Commodity Futures Trading Commission and Reuters calculations showed.

At 4 p.m. ET, the Canadian dollar was trading at $1.3507 to the greenback, or 74.04 cents US, down 0.4 per cent.

The currency's strongest level of the session was $1.3438, while it touched its weakest since May 24 at $1.3523.

Still, the loonie rose 1.1 per cent for the month. Canadian government bond prices were mixed across the yield curve, with the two-year up one cent to yield 0.695 per cent and the 10-year falling one cent to yield 1.416 percent.

The 10-year yield touched its lowest intraday since Nov. 10 at 1.398 percent.

Canada's trade data for April is due on Friday.