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TORONTO (Reuters) - The Canadian dollar rose against the U.S. dollar on Thursday as domestic data topped estimates, but a sharp drop in oil prices dragged the currency from the two-week high it reached early in the session.
Domestic bond prices fell across the curve as data that showed inflation in Canada rose in May triggered talk about Bank of Canada rate hikes.
The Canadian dollar closed at C$1.0152 to the U.S. dollar, or 98.50 U.S. cents, up from C$1.0181 to the U.S. dollar, or 98.22 U.S. cents, at Wednesday's close.
The currency's rally got under way early in the session when a report showed inflation rose 2.2 percent in May, from a 1.7 percent rise in April and ahead expectations.
It added to the gains and hit a two-week high when a report released shortly after showed Canadian wholesale trade jumped 1.4 percent in April from March, also comfortably ahead of estimates for an increase of 0.6 percent.
The Canadian currency shot to C$1.0108 to the U.S. dollar, or 98.93 U.S. cents, which marked its highest level since June 4. But concerns that a move by China to raise fuel prices could curb demand for oil, a key Canadian export, shook the dollar.
"It looked like we were going to keep rallying and then we get news out of China on fuel prices and oil prices come back and cut the legs out of the Canadian dollar's rally," said David Watt, senior currency strategist at RBC Capital Markets.
"So you get two pieces of good news, one piece of bad news so literally you get that two steps forward and one step back and now we're left in a range."
Oil prices, which often influence the commodity-linked Canadian dollar's performance, tumbled $5 a barrel after China decided to raise domestic fuel prices in a move that is likely to crimp demand.
The market will now look to a speech late Thursday by Bank of Canada Governor Mark Carney in Calgary, on "Capitalizing on the Commodity Boom: The Role of Monetary Policy" for more clues on the bank's outlook on the economy and interest rates.
Canadian bond prices all ended lower given the consumer price index data, while a slide in the bigger U.S. Treasury market also added to the negative sentiment.
"It's just the higher than expected print on headline inflation in Canada and the growing fear the Bank of Canada will start tightening policy," said Sal Guatieri, senior economist at BMO Capital Markets.
Guatieri also said Carney's speech later on Thursday will have an impact, but not until early Friday when the bond market reopens.
The two-year bond fell 19 Canadian cents to C$100.74 to yield 3.354 percent. The 10-year bond slid 38 Canadian cents to C$100.98 to yield 3.869 percent.
The yield spread between the two-year and 10-year bond was 52.0 basis points, down from 56.1 at the previous close.
The 30-year bond lost 50 Canadian cents to C$113.50 for a yield of 4.190 percent. In the United States, the 30-year treasury yielded 4.766 percent.
The three-month when-issued T-bill yielded 2.72 percent, up from 2.67 percent at the previous close.