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TORONTO (Reuters) - The Canadian dollar fell 0.3 percent against the U.S. dollar on Tuesday, after retail sales data for May came in slightly weaker than expected.
Domestic bond prices rose on the data, but then tracked the U.S. market lower after hawkish comments on inflation by a U.S. Federal Reserve member.
At 9:15 a.m., the Canadian dollar was at C$1.0040 to the U.S. dollar, or 99.60 U.S. cents, down from C$1.0014 to the U.S. dollar, or 99.86 U.S. cents, at Monday's close.
The currency hovered around parity for much of the overseas session, but then fell to a session low of C$1.0062 shortly after the May retail sales numbers were released.
Statistics Canada said soaring gasoline prices drove up Canadian retail sales by 0.4 percent in May from April but gains were limited by weak clothing-store sales. Excluding autos, sales rose by 0.4 percent.
Analysts surveyed by Reuters had expected a median increase of 0.6 percent in overall retail sales and a 0.8 percent increase excluding auto sales.
"There was an expectation that due to price increases, above all else, there would be a stronger reading in May, as many of the activity numbers that are measured in nominal terms have been boosted by sharp price increases," said Adam Cole, head currency strategist at RBC Capital Markets, in London.
May data for manufacturing shipments and wholesale trade, released recently, had both beat expectations.
Cole said that despite the weaker than expected data, the fact that retail sales in April rose 1.2 percent on the core measure and was followed by another positive number in May pointed to a solid second quarter.
Looking ahead, inflation data for June is due Wednesday. The Bank of Canada said in its Monetary Policy Report Update last week that soaring oil prices would lift headline inflation as high as 4.3 percent in early 2009. Core inflation, which strips out volatile food and energy prices, is expected to stay within the central bank's range of 1 to 3 percent.
Bond prices rose after the Canadian retail sales numbers, but then headed lower along with the U.S. market, as concerns shifted towards inflation.
"I would attribute (the reversal) to (Philadelphia Federal Reserve Bank President Charles) Plosser's comments on inflation," said Sal Guatieri, senior economist at BMO Capital Markets.
Plosser said on Tuesday rising inflation could force the U.S. Federal Reserve to start raising interest rates sooner rather than later, despite the still-weak economy.
The overnight Canadian Libor rate was 2.9500, up from 2.9467 percent on Monday.
Monday's CORRA rate was 3.0030 percent, up from 3.0011 percent on Friday. The Bank of Canada publishes the previous trading day's rate around 9 a.m. daily.
The two-year bond was flat at C$101.05 to yield 3.160 percent. The 10-year bond was flat at $103.60 to yield 3.808 percent.
The yield spread between the two-year and 10-year bond was 64.8 basis points, up from 64.4 basis points.
The 30-year bond fell 15 Canadian cents to C$114.16 for a yield of 4.153 percent. In the United States, the 30-year treasury yielded 4.670 percent.
The three-month when-issued T-bill yielded 2.40 percent, up from 2.37 percent from the previous close.
Editing by Bernadette Baum