By Fergal Smith
TORONTO (Reuters) - The Canadian dollar weakened against its U.S. counterpart on Tuesday, pulling back from an earlier two-week high, as domestic inflation data supported the Bank of Canada's recent decision to pause its interest rate hiking campaign.
Canada's annual inflation rate slowed more than expected to 5.2% in February, its lowest level in 13 months, benefiting from a comparison to last year's strong price increase.
"These are encouraging trends that basically confirms the pause that the Bank of Canada initiated at its last meeting," said Michael Goshko, senior market analyst at Convera Canada ULC.
The BoC left its benchmark interest rate on hold at 4.50% earlier this month, becoming the first major central bank to move to the sidelines.
Since then, turmoil in the global banking sector has raised pressure on other central banks to dial back tightening. The Federal Reserve is due to make an interest rate decision on Wednesday.
The Canadian dollar was trading down 0.4% at 1.3725 to the U.S. currency, or 72.86 U.S. cents. It touched its strongest level since March 7 at 1.3645 before moving lower.
"It (USD-CAD) tried for two days to break down through the 1.3650 level and then sellers gave up ahead of tomorrow's big (Fed) meeting."
The price of oil, one of Canada's major exports, extended its recovery from a 15-month low it hit the previous day. U.S. crude oil futures settled 2.5% higher at $69.33 a barrel.
Canadian government bond yields were higher across the curve, tracking the move in U.S. Treasuries.
The 2-year rose 9.5 basis points to 3.712% but was trading 15.6 basis points further below its U.S. equivalent to a gap of about 46 basis points.
(Reporting by Fergal Smith; editing by Jonathan Oatis and Jane Merriman)