Canadian dollar strengthens vs weaker greenback as core inflation rises

TORONTO (Reuters) - The Canadian dollar strengthened against its U.S. counterpart on Friday as the greenback broadly fell and domestic data showed a pick up in underlying inflation.

FILE PHOTO: A Canadian dollar coin, commonly known as the "Loonie", is pictured in this illustration picture taken in Toronto January 23, 2015. REUTERS/Mark Blinch/File Photo

Canada’s annual inflation rate dipped as expected in December to 1.9 percent but two out of three of the Bank of Canada’s measures of core inflation rose.

Additional firming of core inflation “validates” the Bank of Canada’s interest rate hike earlier this month, said Scott Smith, managing partner at Viewpoint Investment Partners. “The data continues to come out with a positive shine.”

The central bank has raised rates three times since July. Its benchmark interest rate sits at 1.25 percent, its highest since January 2009.

Money markets expect another hike by May. BOCWATCH

The U.S. dollar .DXY fell against a basket of major currencies, bruised by comments by senior U.S. officials this week backing a weak dollar and after data showed U.S. economic growth unexpectedly slowed in the fourth quarter.

The weaker greenback helped underpin the price of oil, one of Canada's major exports. U.S. crude CLc1 prices settled up nearly 1.0 percent at $66.14 a barrel.

At 4 p.m. EST (2100 GMT), the Canadian dollar CAD=D4 was trading 0.4 percent higher at C$1.2327 to the greenback, or 81.12 U.S. cents.

The currency traded in a range of C$1.2294 to C$1.2391. On Thursday, the loonie touched its strongest in four months at C$1.2283.

For the week, the loonie rose 1.4 percent.

Speculators raised bullish bets on the Canadian dollar for the third straight week, data from the U.S. Commodity Futures Trading Commission and Reuters calculations showed. As of Jan. 23, net long positions rose to 22,557 contracts from 17,556 a week earlier.

Canadian government bond prices were mixed across the yield curve, with the 10-year CA10YT=RR rising 1 Canadian cent to yield 2.264 percent.

The gap between Canada’s 2-year yield and its U.S. counterpart widened by 4.1 basis points to a spread of -30.3 basis points, its widest since Dec. 12.

Reporting by Fergal Smith; Editing by Chris Reese