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TORONTO (Reuters) - The Canadian dollar fell against the U.S. dollar on Thursday after a report showed retail sales were weaker than expected in March, but the commodity-linked currency was supported by robust oil prices, which prevented it from losing a lot of ground.
Bond prices fell as inflation concerns had investors betting the interest-rate easing cycles in Canada and the United States would soon come to an end.
The Canadian dollar closed at US$1.0143, valuing a U.S. dollar at 98.59 Canadian cents, down from US$1.0162, valuing a U.S. dollar at 98.41 Canadian cents, at Wednesday's session close.
The currency stayed within a tight range of US$1.0172 and US$1.0125, but was unable to make up losses made early in the session when Statistics Canada said retail sales rose just 0.1 percent in March. That was below the 0.3 percent gain forecast by analysts in a Reuters poll.
"I think most people realize at this point that the Canadian economy is moderating," said Camilla Sutton, currency strategist at Scotia Capital. "We expect further moderation as we go forward, but we still expect it to be strong relative to our neighbors to the south."
Bank of Canada Governor Mark Carney said after a speech in New York that he expects the U.S. downturn to last longer than the bank had previously forecast.
The Bank of Canada has cut its key interest rate by 150 basis points since December in an attempt to spur domestic growth in the face of the U.S. economic slowdown.
Carney added that inflation concerns would have to be taken into account ahead of the bank's June 10 interest rate announcement.
He said a spike in commodity prices had led to a sudden rise in Canadian inflation. Data on Wednesday showed Canada's annual inflation rate jumped to 1.7 percent in April, fueling market speculation that the Bank of Canada would soon pause in its interest rate cutting cycle.
The majority of analysts in a recent Reuters poll said they expect the bank to cut another 25 basis points in June and then move to the sidelines.
U.S. crude oil CLc1 touched a record high above $135 a barrel on Thursday before slipping back. While the high oil prices have helped boost inflation, they have also lent support to the commodity-linked Canadian currency, and limited its slide after the retail sales data.
Canadian bond prices extended their losses from Wednesday after the consumer price index numbers showed inflation was on the rise.
"We've had a massive selloff today," said Eric Lascelles, chief economics and rates specialist at TD Securities.
"It's inflation fears in both Canada and the U.S. In Canada the strong CPI numbers continue to do the driving, prompting the selloff, and in the U.S., it's more the commodity story as oil continues to remain shockingly high."
The two-year bond fell 23 Canadian cents to C$101.42 to yield 3.019 percent. The 10-year bond slid 70 Canadian cents to C$102.51 to yield 3.670 percent.
The yield spread between the two- and 10-year bond was 65.1 basis points, down from 67.3 at the previous close.
The 30-year bond dropped C$1.05 to C$114.80 for a yield of 4.121 percent. In the United States, the 30-year Treasury yielded 4.628 percent.
The three-month when-issued T-bill yielded 2.70 percent, up from 2.66 percent at the previous close.
Editing by Peter Galloway