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The Canadian dollar strengthened against its U.S. counterpart on Friday after data showing a surge in domestic inflation triggered increased bets on another Bank of Canada interest rate hike as soon as September.

Canada’s annual inflation rate surged to 3.0 per cent in July, its highest in nearly seven years, versus 2.5 per cent the previous month as energy prices climbed. Economists had forecast 2.5 per cent annual inflation.

At 3:14 p.m. EDT, the Canadian dollar was trading 0.8 per cent higher at $1.3058 to the greenback, or 76.58 U.S. cents. The currency traded in a range of $1.3053 to $1.3168.

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“With that size of a shock, (the Canadian dollar) probably should have moved more,” said Greg Anderson, global head of foreign exchange strategy at BMO Capital Markets in New York. “This really does raise the possibility of the Bank of Canada raising rates in September again.”

The central bank raised its benchmark interest rate in July for the fourth time in a year, to 1.50 per cent. Chances of another hike next month climbed to about 25 per cent from less than 20 per cent on Thursday, the overnight index swaps market showed.

“Today’s CPI figures are yet another data point that supports the Bank of Canada’s assessment that the economy is operating close to capacity and further rate hikes will be needed,” said Ranko Berich, head of market analysis at Monex Canada and Monex Europe.

The CPI data came a day after a report that showed Canadian factory sales grew by 1.1 per cent in June from May.

The loonie had lost ground against the U.S. dollar earlier in the week due to volatility in emerging market currencies. But it was on track to end the week 0.6 per cent higher.

Mexico’s economy minister, Ildefonso Guajardo, said he hopes to conclude by the middle of next week outstanding bilateral issues with the United States surrounding the renegotiation of the North American Free Trade Agreement. Canada is also part of the NAFTA trade pact.

U.S. crude oil futures settled 0.7 per cent higher. Oil is one of Canada’s major exports.

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Canadian government bond prices were lower across much of a flatter yield curve, with the two-year down 4.5 cents to yield 2.103 per cent.

The gap between Canada’s 2-year yield and its U.S. counterpart narrowed by 3.1 basis points to a spread of 51.0 basis points in favor of the U.S. bond.

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