CANADA FX DEBT-C$ propped up by strong Canada inflation data

* C$ ends at C$0.9957 vs US$, or $1.0043

* Gains 0.6 percent for the week

* Canada Jan. inflation up more than expected

* Bond prices retreat across curve

By Jennifer Kwan

TORONTO, Feb 17 (Reuters) - Canada’s dollar eked out a small gain against the U.S. dollar on Friday after data showed inflation rose more than expected last month, but the move is unlikely to prompt the Bank of Canada to raise interest rates this year.

The annual inflation rate increased to 2.5 percent in January from 2.3 percent in December, helped higher by strong energy and transportation prices.

The year-over-year increase was slightly greater than the 2.3 percent predicted by analysts, pushing the currency to C$0.9941 against the greenback, or $1.0059, from around C$0.9961, or $1.0039 immediately before the release.

Part of the reason why the Canadian dollar managed to notch gains was the relatively strong CPI this morning, said Charles St-Arnaud, Canadian economist and currency strategist at Nomura Securities International in New York.

“It put more weight on the probability that the Bank of Canada won’t cut rates,” he said.

Overnight index swaps, which trade based on expectations for the central bank’s key policy rate, showed that after the data, traders reduced bets on a rate cut in the second half of 2012.

In a Reuters poll conducted after the data, most of Canada’s primary dealers expect the Bank of Canada to keep interest rates steady until at least 2013 as subdued domestic economic growth and persistent global turbulence keep the central bank on the sidelines.

Higher interest rates tend to help currencies strengthen by attracting international capital flows, and the prospect of monetary easing typically weakens them.

Elsewhere, Canadian dollar longs advanced to roughly a six-month peak, according to data from the Commodity Futures Trading Commission released on Friday. To be short a currency is to bet it will decline in value, while being long is a view its value will rise.

The Canadian dollar finished at C$0.9957 versus the U.S. dollar, or $1.0043, up slightly from Thursday’s North American close of C$0.9965 versus the U.S. dollar, or $1.0035.

The currency gained 0.6 percent for the week, according to Thomson Reuters data.

Eric Lascelles, chief economist at RBC Global Asset Management, said the currency was also helped by a slightly better tone in broader markets.

“You look around the world and the U.S. dollar is simply fairly soft today in the sense that the risk-on trade is at work and stocks are a little higher,” he said.

“Various currencies from the euro on through some of the more traditional commodity players have managed to make a gain.”

World stocks hit a 6-1/2-month peak and the euro gained on Friday, buoyed by hopes that Greece will seal a long-awaited bailout deal next week that is needed to avert a disorderly debt default.

Canadian bond prices tracked U.S. Treasuries lower across the curve, but largely underperformed across the curve.

Canada’s two-year bond retreated 5 Canadian cents to yield 1.102 percent. The 10-year bond dropped 26 Canadian cents to yield 2.059 percent.