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TORONTO (Reuters) - Canada's dollar closed at its weakest in more than two months against its U.S. counterpart on Thursday as the greenback gathered steam after a report showed retail sales in the United States were stronger than expected.
Domestic bond prices, with no Canadian data to consider, ended the session lower across the curve alongside the bigger U.S. Treasury market as dealers braced for U.S. consumer prices data on Friday that could top expectations and fan concerns about inflation.
The Canadian dollar closed at C$1.0232 to the U.S. dollar, or 97.73 U.S. cents, down from C$1.0200 to the U.S. dollar, or 98.04 U.S. cents, at Wednesday's close.
The currency's lower close put an end to a two-session rising streak that began after the Bank of Canada went against market expectations for a rate cut and left its key overnight rate steady at 3.00 percent.
But the slide in the Canadian dollar was due more to a rally in the greenback than homegrown concerns as U.S. retail sales data topped estimates and gave U.S. Federal Reserve more latitude to hike interest rates to stem inflation.
"The stronger-than-expected U.S. retail sales release this morning provides a positive light towards the U.S. economy," said Gareth Sylvester, senior currency strategist at HIFX Plc in San Francisco. "So on the back of that the market is just growing in confidence and the U.S. dollar received a boost across the board."
Despite closing at its lowest since March 31, the Canadian dollar did manage to rally 0.5 percent from a session low of C$1.0280 to the U.S. dollar, or 97.28 U.S. cents, which it hit moments after the retail data was released early in the North American session.
Helping the commodity-linked Canadian dollar bounce off its session low was a rise in oil prices, which tend to help the currency since Canada is a key exporter of oil.
Sylvester said the Canadian dollar will remain wedged in the tight range it has occupied for months unless there is a considerable break above C$1.0300 to the U.S. dollar.
The Canadian currency has traded near par with its U.S. counterpart all year after rising 17.5 percent in 2007. It fell to a 2008 low of C$1.0380 on to the U.S. dollar, or 96.34 U.S. cents, on January 22, and reached a high of US$1.0297, valuing a U.S. dollar at 97.11 Canadian cents, on February 28.
Canadian bond prices all finished lower as events out of the United States convinced many investors the U.S. Federal Reserve will soon begin raising its federal funds rate after an aggressive easing campaign.
Also weighing on the bond markets was concern that Friday's CPI report out of the United States could top estimates calling for a 0.5 percent increase in May.
"If we had a strong (CPI) number two or three months ago I think the market would have been happy to shrug it off on the notion that central bankers are paying more attention to growth ... and because central bankers weren't really worried about rising inflation expectations," said Mark Chandler, fixed income strategist at RBC Capital Markets. "That's all changed dramatically and the tolerance for a strong number is very low right now."
The two-year bond fell 22 Canadian cents to C$100.65 to yield 3.403 percent. The 10-year bond slid 60 Canadian cents to C$100.88 to yield 3.882 percent.
The yield spread between the two-year and 10-year bond was 47.9 basis points, down from 51.4 at the previous close.
The 30-year bond lost 65 Canadian cents to C$113.30 for a yield of 4.202 percent. In the United States, the 30-year Treasury yielded 4.761 percent.
The three-month when-issued T-bill yielded 2.80 percent, unchanged from the previous close.
Editing by Frank McGurty