* Canadian dollar falls 0.7 percent against U.S. dollar
* May retail sales climb, but less than expected
* Bond prices follow U.S. down on inflation, stocks
By Lynne Olver
TORONTO, July 22 (Reuters) - The Canadian dollar fell 0.7
percent against the U.S. dollar on Tuesday on
weaker-than-expected retail sales data for May and a widespread
rally in the greenback against major currencies.
Canadian bond prices rose initially, but later followed the
U.S. fixed income market lower after hawkish inflation comments
from a U.S. Federal Reserve member and a rebound in U.S
The Canadian dollar closed at C$1.0084 to the U.S. dollar,
or 99.17 U.S. cents, down from C$1.0014 to the U.S. dollar, or
99.86 U.S. cents, at Monday's close.
The currency hovered near parity for much of the overseas
session, but then dropped to C$1.0062 shortly after the May
retail sales numbers were released, and fell steadily for most
of the morning.
Statistics Canada said soaring gasoline prices drove sales
up by 0.4 percent from April, but excluding price changes,
sales rose just 0.1 percent. Excluding autos, sales rose by 0.4
percent. See [ID:nN22252489]
Analysts surveyed by Reuters had expected a 0.6 percent
rise in overall retail sales, and a 0.8 percent increase
excluding auto sales.
"No disaster, but it was a pretty soft number and certainly
not near the expectations, so there was a bit of a liquidation
move on the back of that," said Shaun Osborne, chief currency
strategist at TD Securities.
"This morning's disappointing retail sales data reinforce
the view that the Canadian consumer is fading somewhat as
higher headline inflation saps real spending power," Merrill
Lynch Canada economist David Wolf said in a research note.
Aside from the sales data, the U.S. dollar was rallying
against major currencies such as the euro, Osborne noted.
Remarks by Treasury and Fed officials were interpreted as
supporting the U.S. currency.
Statistics Canada will release June inflation data on
Wednesday, but market observers said the central bank has
already braced traders for what could be a high reading.
In its Monetary Policy Report update last week, the Bank of
Canada said soaring oil prices would lift headline inflation as
high as 4.3 percent in early 2009, while core inflation, which
strips out volatile food and energy prices, should stay within
the bank's 1 percent to 3 percent target range.
With the U.S. dollar pushing through C$1.010 during
Tuesday's session, "it really does look as if the Canadian
dollar may soften up a little bit more," Osborne said.
The Bank of Canada has strongly hinted that interest rates
are on hold "so I think it's going to take a very strong
(inflation) number to lift the Canadian dollar substantially
from here," Osborne added.
BONDS CLOSE LOWER
Bond prices initially rose after the Canadian retail sales
numbers, but then reversed course and slipped lower across the
yield curve with the U.S. market.
Philadelphia Federal Reserve Bank President Charles Plosser
said on Tuesday that rising inflation could force the Fed to
start raising interest rates sooner rather than later, while
lower oil prices boosted U.S. stocks late in the session,
overshadowing financial sector concerns.
"That took some of the bid out of the fixed-income markets,
out of the sovereign markets," said Stewart Hall, market
strategist at HSBC Canada.
As for Wednesday's CPI report, the Bank of Canada has taken
away some potential "shock value" in the numbers, Hall noted.
"Everyone seems to be on the same page, that you're going
to get a 3 percent print, maybe 3-percent-plus, on the headline
inflation rate," Hall said.
The two-year bond dipped 9 Canadian cents to C$100.96 to
yield 3.210 percent. The 10-year bond fell 33 Canadian cents to
C$103.27 to yield 3.847 percent.
The yield spread between the two-year and 10-year bond was
63.7 basis points, up from 64.4 basis points.
The 30-year bond fell 36 Canadian cents to C$113.95 for a
yield of 4.165 percent. In the United States, the 30-year
treasury yielded 4.672 percent.
The three-month when-issued T-bill yielded 2.45 percent, up
from 2.37 percent from the previous close.
(Editing by Peter Galloway)