(Adds analyst quotes and background details and updates prices)
* Canadian dollar at C$1.3101, or 76.33 U.S. cents
* Loonie touches strongest since Feb. 16 at C$1.3057
* Bond prices higher across yield curve
* 10-year yield touches a 2-1/2-month low at 1.599 percent
By Fergal Smith
TORONTO, Feb 24 (Reuters) - The Canadian dollar notched a one-week high against its U.S. counterpart on Friday after data showed a spike in domestic inflation, but some gains were pared ahead of a Bank of Canada interest rate decision next week.
Economists say the central bank will put more stock in its three measures of core inflation which were all below 2 percent. But the jump in headline inflation to its highest annual rate in more than two years of 2.1 percent caught market participants off guard. is a pretty eye-catching number," said Andrew Kelvin, senior rates strategist at TD Securities.
"This is certainly more substantial than we'd anticipated."
Bank of Canada Governor Stephen Poloz said in January that an interest rate cut remains on the table if the risks facing the country are realized. He warned of "material consequences" if U.S. President Donald Trump enacts protectionist policies.
"It is hard to see them being as dovish as they were last time," said Michael Goshko, corporate risk manager at Western Union Business Solutions.
Improved domestic and global data, higher oil prices and reduced risk of trade disruptions have improved the outlook for Canada's commodity-linked currency, Goshko added.
On Thursday, U.S. Treasury Secretary Steven Mnuchin said he does not see any changes to the North American Free Trade Agreement in the short term. Canadian dollar CAD=D4 ended at C$1.3109 to the greenback, or 76.28 U.S. cents, slightly stronger than Thursday's close of C$1.3114, or 76.25 U.S. cents.
The currency's weakest level of the session was C$1.3119, while it touched its strongest since Feb. 16 at C$1.3057.
For the week, the loonie dipped 0.1 percent.
Gains for the Canadian dollar on Friday came even as prices of oil, one of Canada's major exports, fell. U.S. crude CLc1 prices settled 46 cents lower at $53.99 a barrel on worries about rising U.S. supplies. O/R
The U.S. dollar .DXY edged higher against a basket of major currencies, but was restrained by investors' doubts about the likelihood of swift U.S. tax reform. border adjustment tax is part of the House Republican tax reform blueprint. The loonie would be among the biggest losers if it is implemented, analysts say government bond prices were higher across a flatter yield curve in sympathy with U.S. Treasuries amid European political uncertainty.
The 10-year CA10YT=RR climbed 54 Canadian cents to yield 1.605 percent. It touched its lowest intraday since Dec. 7 at 1.599 percent.