* C$ ends firmer at C$0.9565, or $1.0455
* Bonds mostly lower across curve (Updates details and comments)
By Solarina Ho
TORONTO, April 19 (Reuters) - The Canadian dollar powered to a one-week high against the U.S. dollar on Tuesday after data showed Canada's annual inflation rate last month jumped to its highest level since September 2008, putting more pressure on the Bank of Canada to raise interest rates.
On a year-over-year basis, the inflation rate in March shot up to 3.3 percent from 2.2 percent in February, well above market expectations, and above the Bank of Canada's target range of 1 percent to 3 percent. The core rate remained tame, however, but was still higher than market predictions. [ID:nN19160402]
"We had a very strong move initially, and from there the market died a bit of a slow death this afternoon," said Steve Butler, director of foreign exchange trading at Scotia Capital.
"The question is -- and this is probably why we didn't see further gains from the initial jolt after the CPI -- does that really change the Bank of Canada?" he said, adding that it was unlikely the inflation number brought a May interest rate hike back into play.
The Canadian dollar CAD=D4 finished at C$0.9565 to the U.S. dollar, or $1.0455, well above Monday's North American finish of C$0.9642, or $1.0371.
Underlying some of the currency's strength was a rebound in oil prices, following Monday's correction. Oil is a key Canadian export and movements in the price often influence the commodity-linked Canadian dollar. [O/R]
"More than anything, (yesterday) was a big cleansing of some positions, so the market's getting back that momentum," Butler said.
"I'm not really sure what exactly the catalyst is going to be, but I do think it's just a matter of time before we see Canada crack that C$0.95 cent level...The bottom line is the fundamentals in Canada are still great."
Canadian bond prices were mostly lower across the curve as market players priced in an increased probability of higher rates at every Bank of Canada policy-announcement date from July to December.
"Inflationary pressure has begun to enter Canada and this will significantly change the market's expectation of what the Bank of Canada will do in terms of interest rates," said Camilla Sutton, chief currency strategist, at Scotia Capital.
A poll of primary dealers conducted on Tuesday found that eight out of the 12 primary dealers believed the central bank will resume raising interest rates in July, up from seven in a poll taken before the Bank of Canada held rates steady earlier this month. [CA/POLL] [ID:nN19150176]
The two-year bond CA2YT=RR, which is especially sensitive to the bank's policy moves, was down 14 Canadian cents to yield 1.770 percent, while the 10-year bond CA10YT=RR lost 23 Canadian cents to yield 3.264 percent. (Editing by Peter Galloway)