TORONTO, Oct 21 (Reuters) - The Canadian dollar strengthened against its U.S. counterpart on Tuesday as the gap between U.S. and Canadian bond yields narrowed after domestic data showed inflation climbing to a seven-month high.
The loonie was trading 0.1% higher at 1.4020 per U.S. dollar, or 71.33 U.S. cents, after moving in a range of 1.4004 to 1.4065. Last Tuesday, the currency hit a six-month low at 1.4079.
The U.S. dollar (.DXY), rose against a basket of major currencies as the election of Japan's prime minister weighed on the yen.
"Canada tends to do well when the U.S. dollar is strong but more importantly was higher-than-expected CPI," said Marc Chandler, chief market strategist at Bannockburn Global Forex LLC.
Canada's annual inflation rate increased to 2.4% last month, its highest since February and up from 1.9% in August, mainly led by a smaller decline in gasoline prices on a yearly basis when compared with the previous month and a rise in food prices. Economists had expected the consumer price index to rise 2.3%.
"Even though the Canadian dollar has responded well, the market is still pricing in a strong chance of a rate cut next week," Chandler said.
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Investors see a roughly 80% chance the BoC cuts its benchmark interest rate at a policy decision on October 29, down from 86% before the data. Last month, the central bank lowered its policy rate to a three-year low of 2.50%, its first move since March.
The price of oil , one of Canada's major exports, was up 0.1% at $57.91 a barrel, clawing back a small part of its recent declines.
Canadian bond yields moved higher across the curve. The 2-year was up 4.8 basis points at 2.402%, while the gap between it and the equivalent U.S. rate narrowed by 5.9 basis points to about 105 basis points in favor of the U.S. note.
Reporting by Fergal Smith; Editing by Barbara Lewis
