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TORONTO (Reuters) - The Canadian dollar eked out a small gain against its U.S. counterpart on Friday and outperformed its G10 currency peers, as equity and oil prices recovered after a sharp sell-off the day before on global economic growth fears.
Oil prices rebounded Friday from 18-month lows, while gold and base metals also eked out gains. <O/R> <GOL/> <MET/L>
"Commodity prices are a touch higher compared to where they were yesterday. It's helping the Canadian dollar today," said Charles St-Arnaud, an economist and currency strategist with Nomura Securities in New York.
"You had an outsized decline (Thursday) so it is more reversing (of) some of that," he said.
Surveys on Thursday showed business activity across the euro zone shrank for a fifth straight month in June and Chinese manufacturing contracted, while weaker overseas demand slowed U.S. factory growth. The data sent global equity and commodity markets sharply lower.
Investor sentiment was also supported on Friday as leaders of Germany, France, Italy and Spain agreed on a 130 billion euros (US$163 billion) package to revive growth in the region.
The Canadian currency ended the session at C$1.0246 to the greenback, or 97.60 U.S. cents, up from Thursday's North American session finish of C$1.0293, or 97.15 U.S. cents. It dipped 0.3 percent for the week.
Earlier in the day, the currency touched C$1.0301 versus the U.S. dollar, or 97.08 U.S. cents, its weakest since June 13, after domestic data showed Canada's annual inflation slowed more sharply than expected in May to 1.2 percent.
Inflation, down from 2 percent in April, came in below the 1.5 percent median forecast by analysts in a Reuters poll.
The closely watched core annual inflation rate, a better measure of underlying price trends because it excludes eight volatile items, stayed closer to the Bank of Canada's 2 percent target, slowing to 1.8 percent in May from 2.1 percent the previous month.
But the reaction to the domestic data was fleeting. The Bank of Canada has "got much bigger items on their plate" than inflation, said Doug Porter, deputy chief economist at BMO Capital Markets.
"I don't think inflation is crowding the top of anybody's worry list at this point. So I don't think it has a big effect on the bank, but at the very least it just sort of reinforces the message that there's not any rush for the bank to act on its tightening bias," he said.
Overnight index swaps, which trade based on expectations for the central bank's key policy rate, showed that traders slightly increased bets on a rate cut in late 2012 after the inflation data.
Mark Chandler, head of Canadian fixed income and currency strategy at RBC Capital Markets, said these days the Canadian currency is largely guided by external factors.
"I think the Canadian dollar is still trading on an overall risk basis," said Chandler.
All eyes are expected to be on a European Union summit scheduled for the end of next week in Brussels where leaders will address the region's debt crisis.
Canadian bonds mirrored moves in U.S. Treasuries, which fell as investors prepared for $99 billion in debt next week. <US/>
The two-year Canadian government bond, which is especially sensitive to Bank of Canada interest rate moves, fell 4 Canadian cents to yield 1.063 percent, while the benchmark 10-year bond was down 50 Canadian cents to yield 1.802 percent.
Additional reporting by Allison Martell and Euan Rocha; Editing by Gary Crosse