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C$ keeps pace with stronger greenback after inflation surprise

FILE PHOTO: A Canadian dollar coin, commonly known as the "Loonie", is pictured in this illustration picture taken in Toronto

By Fergal Smith

TORONTO (Reuters) - The Canadian dollar was barely changed against the U.S. dollar on Tuesday, but it outperformed most other G10 currencies as hotter-than-expected domestic inflation data led to investors betting on a possible further rate hike by the Bank of Canada.

The loonie was trading nearly unchanged at 1.3470 per U.S. dollar, or 74.24 U.S. cents, after moving in a range of 1.3405 to 1.3493. It and the Swiss franc were the only two G10 currencies to avoid losses against the greenback.

"There was a feeling that Canadian inflation was on autopilot towards tolerable levels but maybe that's not the case," said Adam Button, chief currency analyst at ForexLive.

Canada's consumer price index rose 4.4% year-over-year in April after a 4.3% increase in March, marking the first increase in 10 months. Analysts had expected inflation to cool to 4.1%.

"With inflation staying stubbornly high and signs of reacceleration in Canadian housing, the Bank of Canada won't be able to cut rates this year," Button said.

The BoC has paused its tightening campaign, leaving its benchmark rate on hold at a 15-year high of 4.50% since January.

Money markets had been anticipating a continued period of steady policy before a possible shift to rate cuts before the end of 2023. They now see a near 50% chance of a rate increase by July.

Canada's housing market has showed signs of recovery after a year-long slump.

The U.S. dollar rose against a basket of major currencies after data showed a solid underlying trend for U.S. retail sales, while the price of oil, one of Canada's major exports, settled 0.4% lower at $70.86 a barrel.

The Canadian 2-year yield rose 14.8 basis points to 3.961%, its highest level since March 10, while the 10-year was up 11 basis points at 3.063%.

(Reporting by Fergal Smith; Editing by Alexandra Hudson)