* C$ falls to C$1.0017 or 99.83 U.S. cents
* Canada inflation rate dips in March
By Claire Sibonney
TORONTO, April 23 (Reuters) - The Canadian dollar loosened its grip on parity against the greenback on Friday after data showed inflation in the country surprisingly dropped, which put a damper on the prospect of aggressive near-term rate hikes.
Canada's annual inflation rate in March dipped to 1.4 percent from 1.6 percent in February as travel tour and accommodation costs returned to pre-Winter Olympic levels. The annual core inflation rate dropped to 1.7 percent from 2.1 percent. [ID:nOTT003905]
The Canadian dollar CAD=D4 weakened following the data, hitting a session low of C$1.0050, or 99.50 U.S. cents, compared with C$1.0003, or 99.97 U.S. cents just before the report.
"We've had a string of somewhat firmer numbers in Canada recently so this perhaps breaks that particular pattern but it doesn't remove the risk of the Bank of Canada tightening down the road and we still think that June is on the cards," said Shaun Osborne, chief currency strategist at TD Securities.
"It does remove the risk that we start off the cycle with the bank at a 50 basis point move."
The Bank of Canada laid the groundwork this week to raise interest rates from current record lows, saying it was time to start withdrawing some of the stimulus that helped pull Canada out of recession. [ID:nN22251878]
The central bank said it was no longer promising to keep its key rate at 0.25 percent until the end of this quarter. Its next rate decision is June 1.
But given tame inflation data, "the FX market is also at least having some second thoughts on just how aggressive the Bank of Canada is going to be," said Doug Porter, deputy chief economist at BMO Capital Markets.
Currencies usually strengthen as interest rates rise because higher rates tend to attract capital flows.
At 7:55 a.m. (1155 GMT), the Canadian dollar was at C$1.0017 to the U.S. dollar, or 99.83 U.S. cents, down from Thursday's finish at exactly C$1 to the U.S. dollar.
Earlier this week, the currency rose as high as C$0.9931, or $1.0069, its strongest level since June 2008, on speculation that the Bank of Canada may soon raise interest rates.
"We have had a build-up of long Canadian dollar positions so this represents perhaps a positional shakeout as well which might clear the air a little bit for the Canadian dollar but generally speaking we're still bullish," Osborne added.
Market watchers will also have a close eye on the impact of February's retail sales figures out at 8:30 a.m. (1230 GMT)
DATA BOOSTS BOND PRICES
Canadian bond yields, which jumped this week following hawkish language from the Bank of Canada, edged lower following the data. The yield on the 1-year T-bill CA1YT=RR fell to 1.24 percent from 1.27 percent just before the data.
The two-year Canadian government bond CA2YT=RR rose 10 Canadian cents at C$99.150 to yield 1.970 percent, down from 2.022 percent just before the report.
The 10-year bond CA10YT=RR shot up 20 Canadian cents to C$100.350 to yield 3.704 percent. Its yield was 4.113 percent just before the data.
Overnight index swaps, which trade based on expectations for the Bank of Canada's key policy rate, edged lower after the announcement, showing the market saw tightening as slightly less likely than before the data. BOCWATCH.
Still, the market was pricing in more than a 90 percent probability that the central bank hikes interest rates by 0.25 percent in June. (Reporting by Claire Sibonney, Editing by Jeffrey Hodgson)