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C$ holds near 5-month low as inflation data weighs

FILE PHOTO: A Canadian Loonie, otherwise known as a one dollar coin, is displayed on top of an American one dollar bill in this posed photograph in Toronto. REUTERS/Mark Blinch (CANADA)

By Fergal Smith

TORONTO (Reuters) - The Canadian dollar strengthened against its U.S. counterpart on Wednesday, but the currency was holding near a five-month low after domestic inflation data that supported bets for interest rate cuts and as Canada's budget projected increased spending.

The loonie was trading 0.1% higher at 1.3810 to the U.S. dollar, or 72.41 U.S. cents, after trading in a range of 1.3784 to 1.3837. On Tuesday, the currency touched its weakest intraday level since Nov. 10 at 1.3846.

"Yesterday's softer-than-expected inflation report highlighted the country's growing underperformance relative to the United States," Karl Schamotta, chief market strategist at Corpay, said in a note.

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Canada's annual inflation rate ticked up as expected to 2.9% in March, but the Bank of Canada's closely watched measures of underlying price pressures eased for a third straight month, data on Tuesday showed.

Money markets expect the Canadian central bank to cut its benchmark interest rate by 60 basis points in 2024, compared to 44 basis points of easing expected by the Federal Reserve.

Canada on Tuesday revealed a new tax on wealthy individuals that will bring in billions of dollars over the next five years to help fund housing programs.

"The (budget) package looks unlikely to pull Canada out of its productivity malaise, but put together with the billions in new spending initiatives announced by the provinces in recent weeks could deliver a 'fiscal impulse' ... that is slightly more positive than the Bank of Canada's last set of projections," Schamotta said.

Canada expects to raise bond issuance by 12% in the current fiscal year as it borrows more to finance a budget deficit and other measures.

The Canadian 10-year yield eased 3.4 basis points to 3.710%, tracking moves in U.S. Treasuries and extending a pullback from a five-month high during Tuesday's session at 3.810%.

(Reporting by Fergal Smith; Editing by Chris Reese)