(Adds analyst comment, details; updates prices)
* Canadian dollar at C$1.3267, or 75.37 U.S. cents
* Canada's annual inflation rate cools to 1.3 percent in May
* Bond prices higher across a steeper yield curve
By Fergal Smith
TORONTO, June 23 (Reuters) - The Canadian dollar fell on Friday against its U.S. counterpart after weaker-than-expected domestic inflation data reduced the chances of an interest rate hike next month from the Bank of Canada.
The annual inflation rate cooled to 1.3 percent in May, below forecasts for 1.5 percent, pushing it further away from the Bank of Canada's 2 percent target. The central bank's three measures of core inflation remained subdued. is going to be very difficult for the Bank (of Canada) to hike as soon as next month when you still haven't carved out a bottom on inflation," said Derek Holt, head of capital markets economics at Scotiabank.
Chances of a hike in July fell to just 22 percent from one-in-three before the inflation report, data from the overnight index swaps market showed. BOCWATCH
The Bank of Canada's top two officials last week said that looser monetary policies put in place in 2015 had largely done their work, and the bank would assess whether rates must remain at near-record lows. expect policymakers to stay hawkish amid concern that rates have been low too long. 4 p.m. EDT (2000 GMT), the Canadian dollar CAD=D4 was trading at C$1.3267 to the greenback, or 75.37 U.S. cents, down 0.2 percent. It traded in a range of C$1.3211 to C$1.3307
For the week, the loonie lost 0.4 percent.
The impact of the weaker inflation data on the currency was tempered by a rally in crude oil, said Karl Schamotta, director of global markets strategy at Cambridge Global Payments.
Prices of oil, one of Canada's major exports, crept up from a 10-month low earlier this week. U.S. crude oil futures CLc1 settled 27 cents higher at $43.01 a barrel.
Speculators cut bearish bets on the Canadian dollar for a fourth straight week, data from the U.S. Commodity Futures Trading Commission and Reuters calculations showed. Canadian dollar net short positions fell to 82,881 contracts as of June 20 from 88,595 a week earlier.
Canadian government bond prices were higher across a steeper yield curve, with the two-year CA2YT=RR up 7 Canadian cents to yield 0.898 percent and the 10-year CA10YT=RR rising 19 Canadian cents to yield 1.479 percent.
The two-year yield fell 3.9 basis points further below its U.S. equivalent to a spread of -44.7 basis points, as Canadian bonds outperformed. On Thursday, the spread touched its narrowest in nearly four months at -40.8 basis points.