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TORONTO, April 17 (Reuters) - The Canadian dollar briefly rose above parity with the U.S. dollar on Thursday, but then tumbled lower as inflation data came in softer than the market had expected, opening the door for the Bank of Canada to cut interest rates next week to soften the blow from the U.S. economic slowdown.
Domestic bond prices rose on the interest rate outlook.
At 9:53 a.m. (1353 GMT), the Canadian dollar was at C$1.0079 to the U.S. dollar, or 99.22 U.S. cents, down from C$1.0014 to the U.S. dollar, or 99.86 U.S. cents, at Wednesday's close.
The currency hit its highest point in nearly a month, at US$1.0012, making a greenback worth 99.88 Canadian cents, before retracing its gains.
Canada's core inflation rate slowed in March to its lowest since July 2005, giving Bank of Canada plenty of leeway to cut interest rates to shore up the economy against fallout from a possible U.S. recession.
The central bank makes its interest rate decision on Tuesday, and the majority of Canada's primary security dealers are looking for a 50 basis point rate cut, to 3.00 percent, according to a Reuters poll.
Another reason for the Canadian dollar weakness was U.S. dollar strength, said George Davis, chief technical strategist at RBC Capital Markets.
"We've seen the (U.S.) dollar register gains pretty much across the board, except for against sterling, and I think that overall bid tone in the U.S. dollar has kind of shifted the market sentiment around."
Davis said much of the greenback's strength can be attributed to comments from Eurogroup Chairman Jean Claude-Juncker speaking out against the single euro's rise.
Juncker reiterated the Group of Seven industrialized nations' message on forex, that the G7 does not like excessive volatility as that is bad for global growth.
Canadian bond prices rose in response to the weaker-than-expected CPI.
The overnight Canadian Libor rate LIBOR01 was 3.4017 percent, up from 3.3983 percent on Wednesday.
Wednesday's CORRA rate CORRA= was 3.4858 percent, down from 3.4874 percent on Monday. The Bank of Canada publishes the previous day's rate at around 9 a.m. daily.
The two-year bond rose 4 Canadian cents to C$102.03 to yield 2.756 percent. The 10-year bond added 14 Canadian cents to C$102.66 to yield 3.653 percent.
The yield spread between the two- and 10-year bonds was 90.3 basis points, up from 88.5 at the previous close.
The 30-year bond gained 13 Canadian cents to C$114.28 to yield 4.150 percent. In the United States, the 30-year treasury yielded 4.509 percent.
The three-month when-issued T-bill yielded 2.55 percent, down from 2.56 percent at the previous close. (Reporting by John McCrank; Editing by Scott Anderson)