TORONTO (Reuters) - Canada's dollar slumped 0.4 percent against its American counterpart on Thursday, as investors bet rising inflation would lead to higher U.S. interest rates, making the greenback more attractive.
Domestic bond prices, with no domestic economic data to influence direction, fell on strong overseas equities markets and a strong reading on a U.S. retail sales report.
At 9:22 a.m. (1322 GMT), the Canadian dollar was at C$1.0240 to the U.S. dollar, or 97.66 U.S. cents, down from C$1.0200 to the U.S. dollar, or 98.04 U.S. cents, at Wednesday's close.
The Canadian dollar was stronger against most other major currencies, with the main exception being the greenback.
"Clearly, the U.S. dollar has had a very strong night and the Canadian dollar has been dragged down just by U.S. dollar strength," said Steve Butler, senior currency strategist at Scotia Capital.
Investors bet the U.S. central bank would soon begin raising interest rates to temper inflation, while expectations of rate hikes in Europe were scaled back.
"The continued inflation story that all the members of the Fed continue to push has got the rate futures very frothy and people are talking about the potential of getting up to three (U.S. interest rate) hikes before year end," said Butler.
U.S. rate futures show a perceived 76 percent chance that the Federal Reserve will increase U.S. rates as soon as August. That number was at 62 percent at Wednesday's close.
The currency hit a session low of C$1.0280, or 97.28 U.S. cents, after data showed that U.S. retail sales rose more than expected in May, the same month the U.S. Treasury issued over $50 billion in rebate checks to American tax payers.
Canadian bond prices fell, as higher equity markets overseas reduced the safe haven bid for government debt, and then sold off even more after the U.S. data.
"It was a strong retail sales report," said Mark Chandler, fixed income strategist at RBC Capital Markets.
"You can't lay all of it at the feet of higher prices and with the revisions as well from the previous month, it's an earlier and stronger-than-expected feature coming from the tax rebate checks."
The overnight Canadian LIBOR rate was at 2.9550 percent, down from 2.9783 percent on Wednesday.
Wednesday's CORRA rate was 3.0036 percent, up from 3.0013 on Tuesday. The Bank of Canada publishes the previous session's rate around 9 a.m. daily.
The two-year bond fell 16 Canadian cents to C$100.71 to yield 3.372 percent. The 10-year bond slid 42 Canadian cents to C$101.06 to yield 3.859 percent.
The yield spread between the two-year and 10-year bond was 48.9 basis points, down from 51.4 at the previous close.
The 30-year bond lost 50 Canadian cents to C$113.45 for a yield of 4.193 percent. In the United States, the 30-year Treasury yielded 4.750 percent.
The three-month when-issued T-bill yielded 2.80 percent, unchanged from the previous close.
Editing by Frank McGurty