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Canadian dollars (loonies) fall through the air in the photo illustration.JONATHAN HAYWARD/The Canadian Press

The Canadian dollar closed lower Friday as the latest reading on inflation made it more unlikely that the central bank will raise interest rates any time soon.

The loonie fell 0.25 of a cent to $1.011 (U.S.) after closing Thursday at a fresh 3 1/2-month high.

Statistics Canada reported that the Consumer Price Index declined 0.1 per cent on a seasonally adjusted basis in July, after decreasing 0.2 per cent in June. Economists had looked for a 0.1 per cent rise. This marked the third consecutive monthly decline in the seasonally adjusted CPI.

The agency said Friday that consumer prices rose at an annual rate of 1.3 per cent in the 12 months to July, following a 1.5 per cent gain in June.

Losses in the currency picked up after the release of the report since the data "suggest little near-term inflationary pressures in the domestic economy, another reason for the Bank of Canada to keep rates on hold," observed CIBC World Markets economist Emanuella Enenajor.

The currency fell about 5 cents in May and early June to around the 96-cent (U.S.) level when the European debt crisis took a turn for the worse as markets focused on high debt levels in Spain. Nervous traders bailed out of risky investments such as equities, commodities and resource-based currencies such as the loonie and piled into U.S. Treasuries.

But optimism has improved on hopes that central bankers are prepared to do whatever is necessary to keep the economic recovery on track and preserve the European monetary union.

This was also the case Friday when traders reacted favourably to remarks by German Chancellor Angela Merkel during her visit to Ottawa. She said Thursday that her country — Europe's biggest economy — is committed to doing everything it can to maintain the euro currency union.

There have also been high hopes that the U.S. Federal Reserve will announce another round of economic stimulus in September. But such a move has been thrown into doubt in the wake of recent positive economic data, including better-than-expected readings on job creation, retail sales and industrial production.

Commodity prices were higher with the September crude contract on the New York Mercantile Exchange up 41 cents to $96.01 a barrel.

Copper added to Thursday's 3-cent advance, up another 4 cents to $3.42 a pound. Prices for the metal, viewed as an economic bellwether as it is used in so many industries, gave up ground earlier this week in the wake of weak Chinese export growth data and much lower than expected Japanese economic growth in the second quarter.

And bullion inched up 20 cents to $1,619.40 an ounce.

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