CANADA FX DEBT-Canadian dollar gains as core inflation measures heat up

By Fergal Smith

TORONTO, May 20 (Reuters) - The Canadian dollar strengthened against its U.S. counterpart on Tuesday as investors slashed bets on a Bank of Canada interest rate cut next month after domestic data showed underlying inflation heating up.

The loonie CAD= was trading 0.2% higher at 1.3925 per U.S. dollar, or 71.81 U.S. cents, after moving in a range of 1.3918 to 1.3968.

Canada's annual inflation rate fell to 1.7% in April due to a drop in energy prices but two core measures closely watched by the BoC moved above 3%.

"Ex-food and energy was probably a little bit hotter than expected," said Darcy Briggs, a portfolio manager at Franklin Templeton Canada. "I think it would give the Bank of Canada a chance to pause even further."

The Canadian overnight index swaps market was pricing in a 33% chance of an interest rate cut at the next BoC policy decision on June 4, down from 65% before the data. The central bank left its benchmark rate on hold at 2.75% last month, the first pause since the easing campaign began last June.

The U.S. dollar .DXY fell against a basket of major currencies, weighed down in part by the Federal Reserve's caution over the economy, while the price of oil CLc1, one of Canada's major exports, settled 0.2% lower at $62.56 a barrel.

Canadian government bond yields rose across the curve. The 10-year CA10YT=RR was up 11.6 basis points at 3.290%, after earlier touching its highest level since January 24 at 3.319%.