* C$ edges up to C$0.9682 to the U.S. dollar, or $1.0328
* Bond prices flat to higher
* Market expects high inflation for April
TORONTO, May 19 (Reuters) - Canada's dollar edged higher against a broadly softer U.S. currency on Thursday, ahead of a key Canadian inflation report.
The greenback slumped after U.S. data showed weakness in the economic recovery, causing investors to bet that U.S. monetary policy could stay ultra-loose into mid-2012, in which case, interest rate differentials would likely work against the U.S. currency. [ID:nN19116085]
The Canadian dollarended the North American session at C$0.9682 to the U.S. dollar, or $1.0328, up moderately from Wednesday's close at C$0.9706 to the U.S. dollar, or $1.0303.
Canada's dollar was actually lagging most other major currencies when compared with the greenback on Thursday, which was likely due to weakness in commodity markets, said David Tulk, chief Canadian macro strategist at TD Securities.
Canada is a major exporter of commodities such as oil.
Looking ahead to Friday's domestic data, headline inflation is expected to have reached a 2-1/2 year high of 3.4 percent in April on increased gasoline and food prices. [ID:nN13255914]
Core inflation, which strips out volatile items like gasoline, is seen easing to 1.6 percent after a sharp jump in March.
The figures, along with a report on retail sales for the month of March, are among the last before the Bank of Canada's next interest rate decision on May 31.
While the central bank is expected to leave interest rates at 1 percent, the inflation data could have an impact on its next rate decision in July.
"It's at the back of everyone's mind," said Lorne Gavsie, managing director, foreign exchange, at BMO Capital Markets.
"Certainly the comments from (Bank of Canada Governor Mark) Carney over the past couple of days have everyone focused in on what we may see tomorrow morning."
Carney has said inflation would remain above the bank's target range of 1 to 3 percent in the second quarter, but suggested that price pressures were temporary. [ID:nN16281097]
In the United States, the weak data on home sales and factory activity highlighted the softness in the economic recovery. [ID:nN19134058] [ID:nN19116085]
Some central banks have already starting raising interest rates as their economies pick up after the recession, giving a boost to their currencies. Canada raised interest rates three times last year before pausing at 1 percent.
The unfavorable interest rate differential has been weighing on the greenback. The Canadian dollar is up 2.7 percent against its U.S. counterpart so far this year, despite trending lower in recent weeks, while the euro is up 7 percent.
BONDS FLAT TO HIGHER
The weak U.S. economic data also helped fuel a safe-haven bid in U.S. Treasuries, while Canada's bond market ended flat to higher as the economy was seen on sounder footing, Tulk said.
Canada's two-year bondwas flat, yielding 1.684 percent, while the 10-year bond rose 6 Canadian cents to yield 3.215 percent. (Reporting by John McCrank; editing by Rob Wilson)
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