* C$ climbs to 96.02 U.S. cents
* Canada inflation rate jumps, nears central bank target
* Bond prices weaken after CPI (Updates rates, adds details, quotes)
By Claire Sibonney
TORONTO, Feb 18 (Reuters) - Canada's dollar rose to its highest level in almost a month against the U.S. currency on Thursday after data showed domestic inflation rose more than expected and foreigners flocked to purchase Canadian securities.
Higher gasoline prices pushed Canada's annual inflation rate to just below the central bank's 2 percent target in January, encouraging talk about early interest rate hikes. [ID:nN18188082]
"It was good for the currency in the sense that slightly firmer inflation, if that becomes a trend, would force the Bank of Canada's hand to begin implementing higher interest rates sooner than expected and that would in turn be positive for the Canadian dollar," said Camilla Sutton, a currency strategist at Scotia Capital.
As well, data showed foreigners increased their purchases of Canadian securities in December to C$11.23 billion from C$10.58 billion in November, wrapping up a record year for foreign portfolio investments. [ID:nN18180480]
The data "underlined the continued attractiveness of Canadian assets for foreign investors at the moment" and reflected the country's relatively strong fundamentals, said Shaun Osborne, chief currency strategist at TD Securities.
Osborne noted that the Canadian dollar outperformed all other G10 currencies on Thursday, reaching its highest level against the euro since October 2007 at C$1.4109.
"The underlying trend clearly seems to be towards Canadian dollar strength," he said.
The price of oil, which often influences the Canadian dollar, shot up over $78 a barrel, supported by a drop in U.S. distillate inventories. [O/R]
Investors also piled into gold, which further supported the commodity-linked currency. [GOL/]
The Canadian dollar closed at C$1.0414 to the U.S. dollar, or 96.02 U.S. cents, up from Wednesday's close at C$1.0452, or 95.68 U.S. cents. Earlier, the currency hit C$1.0397 or 96.18 U.S. cents, its highest level in nearly a month.
YIELDS ON RATE FUTURES RISE
Yields on overnight index swaps, which trade based on expectations for the key rate, edged higher after the Canadian inflation data, which showed the market saw tightening as slightly more likely.
The pricing of the market suggests the rate will be around 0.50 percent in July and 0.75 percent in October. BOCWATCH
The Bank of Canada has pledged to hold its key interest rate unchanged at 0.25 percent until the end of June as long as inflation stays in check.
Analysts said the inflation figures should smooth out in the coming months as the base effects of low fuel prices a year earlier could fall out of the equation by mid-2010.
Canadian bonds yields were also slightly higher after the inflation data, with additional pressure from stronger equity markets and U.S. Treasury prices, which fell after the government announced a record amount of bonds for its auctions next week. [US/]
The two-year Canadian government bond CA2YT=RR was down 4 Canadian cents at C$100.280 to yield 1.359 percent, while the 10-year bond CA10YT=RR fell 16 Canadian cents to C$102.02 to yield 3.493 percent. (Reporting by Claire Sibonney; Editing by Jeffrey Hodgson)