CANADA FX DEBT-C$ weakens after soft inflation data; eye on Fed
* C$ softens to C$0.9976, or $1.0024
* Tame inflation cuts pressure on Bank of Canada to hike
* Bonds also rally on weak equities, risk aversion
* Federal Reserve's FOMC, U.S. new home sales in focus (Updates to close. Adds details, comment)
By Solarina Ho
TORONTO, Jan 25 (Reuters) - The Canadian dollar weakened against the U.S. currency on Tuesday as softer-than-expected inflation data made it more likely that the Bank of Canada will hold rates steady in the near-term.
Higher gasoline prices helped push Canada's annual headline inflation rate to 2.4 percent from 2 percent the month before, but this was below the 2.5 percent economists had forecast. [ID:nN25258565]
"A softer-than-expected inflation number generally speaking is negative for the Canadian dollar because it means the Bank of Canada is less likely to be raising interest rates soon," said Craig Alexander, chief economist at Toronto-Dominion Bank.
Currencies usually strengthen as domestic interest rates rise because this tends to lure capital flows from other countries.
The currency CAD=D4 closed at C$0.9976 to the U.S. dollar, or $1.0024, down from Monday's North American finish at C$0.9946 to the U.S. dollar, or $1.0054.
It hit a session low of C$1.0005, or $0.9995 just after the inflation data was released.
"The action was entirely this morning ... the odds of Canada tightening declined, that pushed the dollar weaker and now we've pretty much moved sideways since then," said Benjamin Reitzes, an economist at BMO Capital Markets.
Weaker oil prices and equity markets also weighed on the commodity-sensitive Canadian dollar. The price of oil, a major Canadian export, fell for a sixth consecutive day. [O/R] [MKTS/GLOB]
With little significant Canadian data out for the rest of the week, analysts said investors will be taking their cues from south of the border.
The statement from the U.S. Federal Reserve's policy-setting meeting on Wednesday will be in focus, alongside new U.S. home sales data, as the health of the housing market is seen as key to the U.S. economic recovery.
"A stronger U.S. always bodes well for Canada," said Reitzes.
Canadian bond prices rallied across the board. The inflation data pushed money market and bond yields lower at the start of the session, with weak stock markets spurring further buying.
The two-year bond CA2YT=RR was up 9.2 Canadian cents to yield 1.676 percent, while the 10-year bond CA10YT=RR added 43 Canadian cents to yield 3.265 percent.
Canadian government bonds outperformed U.S. Treasuries, which were also boosted by talk of a U.S. budget freeze. [US/] (Editing by Jeffrey Hodgson)
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