Rate hike bets lift Canadian dollar to 2nd straight weekly gain

TORONTO, Sept 22 (Reuters) - The Canadian dollar edged lower against its U.S. counterpart on Friday but held on to a weekly gain, as higher oil prices and the prospect of additional Bank of Canada interest rate hikes offset preliminary data showing that retail sales fell in August.

The loonie was trading 0.1% lower at 1.3490 to the greenback, or 74.13 U.S. cents, after moving in a range of 1.3424 to 1.3491. For the week, the currency was up 0.2%, its second straight week of gains.

"Stronger-than-expected Canadian inflation data helped lift the CAD this week," said Shaun Osborne, chief currency strategist at Scotiabank. "The inflation data boosts the risk of forcing the Bank of Canada to tighten its policy rate again."

Canada's annual inflation rate in August jumped to 4.0% from 3.3% in July on higher gasoline prices, data showed on Tuesday.

Canada's record of declining productivity over the past three years is likely to make it more difficult for the BoC to tame inflation, raising the prospect of additional interest rate hikes even as the economy slows.

Money markets see a 45% chance of a rate increase at the BoC's next policy announcement on Oct. 25, while further tightening is fully priced in to the market by March.

Data on Friday showed that Canadian retail sales grew by 0.3% in July from June, but were likely down 0.3% in August.

The price of oil, one of Canada's major exports, settled 0.5% higher at $90.03 a barrel, moving closer to the 10-month high posted earlier in the week.

Canadian government bond yields eased across the curve, tracking moves in U.S. Treasuries. The 10-year was down 6.6 basis points at 3.907%, after earlier touching its highest intraday level since January 2008 at 3.990%.