CANADA FX DEBT-C$ weakens on Europe worry as inflation rally fades

* C$ at C$1.0165 vs US$, or 98.38 U.S. cents
    * February inflation jump seen unlikely to spur rate hike
    * Expectations low for January GDP data due on Thursday

    By Alastair Sharp
    TORONTO, March 27 (Reuters) - The Canadian dollar ended
slightly weaker versus the U.S. dollar on Wednesday as fears
about the state of the euro zone economy resurfaced and as the
currency retreated after rising early in the day on data that
showed higher than expected domestic inflation.
     Canada's annual inflation rate jumped to 1.2 percent in
February on higher gas and autos prices from a three-year low of
0.5 percent in January. That was higher than forecast, but still
below the Bank of Canada's target, and not high enough to
persuade economists that the central bank would shift back into
rate-hiking mode.  
    "It was surprising to most people who certainly weren't
looking for an inflation figure as toasty as we saw," said Greg
Moore, foreign exchange strategist at TD Securities.
    "I don't think it is going to make a fundamental change in
the bank's outlook," said Doug Porter, chief economist at BMO
Capital Markets. "I think talk about the bank cutting (rates) is
going to brushed aside now, but I don't think this advances the
timetable on Bank of Canada rate hikes." 
    The loonie, as Canada's currency is known colloquially,
firmed to its strongest level since Feb. 20 soon after the
inflation data but later gave up some of those gains as caution
over the outlook for Europe came to the fore.
    It closed the session at C$1.0165 to the greenback,
or 98.38 U.S. cents, just off its Tuesday close of C$1.0164, or
98.39 U.S. cents.
    Worries about Europe were reinforced by a disappointing
Italian bond auction and by jitters as Cyprus put the finishing
touches on capital control measures to prevent a run on its
    Domestic attention turns next to gross domestic product data
for January due out on Thursday. TD's Moore said that the loonie
could get a boost even if the numbers only reach the consensus
view of very limited growth after several months of weak
    "An on-consensus release is essentially not bad news, and at
this point anything that is not bad news is good news for the
Canadian dollar," he said.
    The currency could test C$1.01 in coming days and parity in
the next few weeks, Moore said, although TD still anticipates a
slip to C$1.06 by the end of the second quarter.
    The price of government bonds was higher across the curve,
with the two-year bond up 2 Canadian cents to yield
0.997 percent, while the benchmark 10-year bond rose
52 Canadian cents to yield 1.760 percent.