(Adds economist quotes and details throughout; updates prices) * Canadian dollar gains 0.7% against the greenback * Canada inflation rate rises in May to a 7-month high of 2.4% * Loonie touches its strongest since June 12 at 1.3282 * Canada-U.S. 2-year spread at narrowest since February 2018 By Fergal Smith TORONTO, June 19 (Reuters) - The Canadian dollar strengthened to a one-week high against its U.S. counterpart on Wednesday, as domestic data showed the highest inflation rate since last October and as the greenback broadly fell after a Federal Reserve interest rate decision. Canada's annual inflation rate climbed to a seven-month high of 2.4% in May, Statistics Canada data indicated. Compared to April, prices were up 0.4%, led by big increase in the recreation, education and reading category. The breadth of the increase was "very narrow" but the Bank of Canada will say there is no immediate need to cut interest rates, said Derek Holt, vice president of capital markets economics at Scotiabank. "The question is, if trade policy risks continue to escalate or don't improve and if the Fed is dragging its policy rate down ... then there are limits to the extent that the bank can sit on its hands." Money markets see about a 50% chance of a Bank of Canada interest rate cut this year. The U.S. dollar weakened against a basket of major currencies after the Federal Reserve announced it held interest rates steady in June, but signaled a possible rate cut by the end of the year. At 4:07 p.m. (2007 GMT), the Canadian dollar was trading 0.7% higher at 1.3281 to the greenback, or 75.30 U.S. cents. The currency, which was boosted on Tuesday by the revival of trade talks between the United States and China, touched its strongest level since June 12 at 1.3282. The price of oil, one of Canada's major exports, fell despite a larger-than-expected decline in U.S. crude inventories. U.S. crude oil futures settled 0.3% lower at $53.76 a barrel. Canadian government bond prices were lower across a steeper yield curve, with the two-year down 1 Canadian cent to yield 1.408% and the 10-year falling 11 Canadian cents to yield 1.435%. The gap between Canada's 2-year yield and its U.S. equivalent narrowed by 11.4 basis points to a spread of 34.6 basis points in favor of the U.S. bond, its smallest gap since February 2018. Separate Canadian data showed that home prices climbed for the first time in nine months in May as the housing market benefited from lower borrowing costs and from an economy that was adding jobs. (Additional reporting by Tyler Choi Editing by Phil Berlowitz)
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