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Canadian dollar climbs to near one-week high on dovish Fed

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* Canadian dollar was rises 0.1% against the greenback

* Canada's annual inflation rate remains at 0.1% in August

* Price of U.S. oil settles 4.9% higher

* Canadian bond yields rise across a steeper curve

By Fergal Smith

TORONTO, Sept 16 (Reuters) - The Canadian dollar rose to its strongest level in nearly one week against the greenback on Wednesday, before giving up some of its gains, bolstered by higher oil prices and the Federal Reserve's promise to keep interest rates pinned near zero.

The Fed released new economic projections which showed interest rates on hold through at least 2023, with inflation never breaching 2% over that time. "The message is dovish, dovish, dovish," said Michael Goshko, corporate risk manager at Western Union Business Solutions.

"The Fed's emphasis on U.S. interest rates being low for longer ... might just give the green light to Canadian dollar bulls." The price of oil, one of Canada's major exports, jumped following a drawdown in U.S. crude and gasoline inventories and as Hurricane Sally forced a swath of U.S. offshore production to shut. U.S. crude oil futures settled 4.9% higher at $40.16 a barrel, while the Canadian dollar was trading 0.1% higher at 1.3169 to the greenback, or 75.94 U.S. cents.

The currency touched its strongest intraday level since last Thursday at 1.3123. Canada's annual inflation rate remained at 0.1% in August as rising food prices were offset by declining gasoline costs, Statistics Canada said. Underlying inflation was firmer, with the average of the Bank of Canada's three core measures of inflation ticking up to 1.7% from 1.6%.

Setting a target for bond yields could help the Bank of Canada reduce the amount of debt it buys to keep interest rates low, checking a threat to market liquidity after the central bank's share of bonds more than doubled this year, strategists said. Canadian government bond yields rose across much of a steeper curve, with the 10-year up 1.4 basis points at 0.571%.

(Reporting by Fergal Smith; Editing by Steve Orlofsky and Jonathan Oatis)

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