June 18 (Bloomberg) -- Canada’s dollar strengthened for a second day after a government report showed inflation unexpectedly accelerated, easing pressure on the Bank of Canada to deploy extraordinary measures to revive growth. “Core inflation is back to the middle of the Bank of Canada’s range; the threat of quantitative easing thus likely lessens,” said David Watt, senior currency strategist in Toronto at RBC Capital Markets, a unit of Canada’s biggest bank. “Hence Bank of Canada discomfort with Canadian dollar strength likely lessens a snick.” The Canadian currency, known as the loonie, appreciated 0.7 percent to C$1.1245 per U.S. dollar at 10:19 a.m. in Toronto, from C$1.1318 yesterday. One Canadian dollar purchases 88.93 U.S. cents. The loonie extended gains after a report by the Federal Reserve Bank of Philadelphia showed manufacturing in the Philadelphia region contracted in June at the slowest pace in nine months. The Conference Board’s index of U.S. leading economic indicators rose more than forecast in May for the second straight month, and a Labor Department report showed the number of Americans getting jobless benefits dropped for the first time since January. U.S. stocks rose, with the Standard & Poor’s 500 Index gaining 1 percent. Canada’s annual consumer price index increased 0.1 percent in May from a year earlier and 0.7 percent from the previous month, Statistics Canada said today in Ottawa. The median forecast of 21 economists in a Bloomberg News survey was for an annualized rate of negative 0.2 percent. Economy ‘Recovering’ “The data shows signs of slight inflation -- that means the economy here is recovering and the Bank of Canada might have to raise rates faster than anticipated,” said David Love, trader of interest-rate derivatives at Le Group Jitney Inc. in Montreal. That boosts the Canadian dollar, Love said. The loonie dropped 2 percent since June 11, when Bank of Canada Governor Mark Carney reiterated a statement that a continuation of its “rapid rise” may threaten the economy. The currency gained the most in May in at least 59 years as investors ventured into riskier assets amid optimism the world economy would recover more quickly than expected. Carney is scheduled to speak today in Regina, Saskatchewan, at 2:15 p.m. New York time. “There might be a short period of selling the U.S. dollar against the Canadian dollar,” said RBC’s Watt. “But Carney speaks today, and he’s been the chaperone at the market party and I expect him to be a dampener again.” The Canadian dollar’s recent strength may force the central bank into printing money and buying assets such as government bonds to offset the dollar’s rise. That policy, known as quantitative easing, has led to declines in the currencies of other countries, such as the U.S. and the U.K. The currency will strengthen to C$1.10 by the second quarter of 2010, according to the median estimate of 38 economists and analysts in a Bloomberg survey.

Source