TORONTO (Reuters) - The Canadian dollar ended slightly lower versus its U.S. counterpart on Tuesday as stronger oil prices could not offset the impact of strong U.S. inflation data, which fueled talk of higher U.S. interest rates and boosted the greenback.
Optimism over North American economic prospects gave both currencies a lift versus the yen and the euro, particularly due to concerns over the health of euro zone banks.
"It's kind of a buy-North American theme we've been seeing," said George Davis, chief technical strategist at RBC Capital Markets, characterizing the interplay between the Canadian and U.S. dollar as a tug-of-war.
"The market's been focused on the better-than-expected data in the U.S., but at the same time, because of the trade relationship with the U.S., there's been some positive spin for the Canadian dollar as well," he said.
The Canadian unit ended the session at C$1.0614 to the U.S. dollar, or 94.22 U.S. cents, down from Monday's close at C$1.0593 to the U.S. dollar, or 94.40 U.S. cents.
The currency hit the day's low of C$1.0652, or 93.88 U.S. cents, early in the session as robust U.S. producer prices data sparked chatter the U.S. Federal Reserve could raise interest rates sooner than expected.
Rising oil prices helped the Canadian dollar rebound as the session progressed, as crude futures gained just under 2 percent on the day, after declining for most of the past two weeks.
Traders will be keeping a close eye on Canadian manufacturing and inflation data over the next two days, but those reports could be overshadowed by the results of the U.S. Federal Reserve meeting on Wednesday as the market will look for any hints about the timetable for possible rate hikes.
Both the Fed and the Bank of Canada have said rates should stay low for the next while, but strong data has raised concerns about inflation and sparked questions as to whether the Fed will stick to its pledge.
"I think the general trend of U.S. dollar strength is likely to continue at least through the Fed tomorrow," Davis said.
Canadian bond prices were mixed, falling on the short end of the yield curve to follow weaker U.S. Treasuries. Canadian stocks eased very slightly, exerting little influence on government debt prices.
The two-year Canadian government bond fell 5 Canadian cents to C$99.93 to yield 1.286 percent, while the 10-year bond rose 1 Canadian cent to C$102.79 to yield 3.402 percent.
Canadian bonds put in mixed performance against Treasuries, with the 10-year yield spread widening to 18.9 basis points below its U.S. counterpart from 15 basis points the previous session.
Reporting by Cameron French; editing by Peter Galloway