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Loonie loses ground as markets look to Bank of Canada interest rate announcement

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TORONTO - The Canadian dollar closed lower Tuesday as markets speculated about what message the Bank of Canada will deliver in its next scheduled interest rate announcement.

The loonie fell 0.1 of a cent to 91.66 cents US.

The key rate, which will be announced on Wednesday, is expected to stay unchanged at one per cent, where it's been since September 2010.

Yet economists will still look to see if the central bank continues to flag concerns about low inflation being the No. 1 concern since inflation has been heading higher recently.

Canada's annual inflation rate climbed to its highest level in two years, reaching two per cent in April, largely driven by an unusually big jump in energy prices.

"An improving fundamental backdrop is complicated by uneven data and a BoC, which is likely to suggest that rates are on hold for an extended period even with inflation back at two per cent as economic slack decreases medium term inflation risk," said Camilla Sutton, Chief FX Strategist, Managing Director Scotiabank Global Banking and Markets.

Statistics Canada will also release the merchandise trade balance for April on Wednesday. Economists expect it to show a $100 million surplus.

Traders will also look ahead to other key domestic data coming out this week.

Canadian job figures for May come out Friday and economists expect about 21,000 jobs were created after the economy shed 29,000 the previous month.

In the U.S., economists also forecast another month of strong job gains. They expect the U.S. government's non-farm payrolls report coming out Friday will show that the American economy cranked out about 219,000 jobs following a much stronger than expected gain of 288,000 in April.

The April report on U.S. factory orders showed a gain of 0.7 per cent, better than the 0.6 per cent rise that economists had expected.

Meanwhile, further weak inflation data from the eurozone raised expectations that the European Central Bank will move to take action to support a fragile recovery.

The European Union’s statistics agency said that inflation in the eurozone came in at 0.5 per cent in May, down from 0.7 per cent in April and short of forecasts for 0.6 per cent.

The data raised concerns that the 18-country eurozone could fall into outright deflation, a sustained drop in consumer prices that chokes off growth as consumers delay purchases and businesses postpone investment.

It also elevated expectations that the ECB will announce stimulus measures as part of its scheduled rate announcement on Thursday.

A commentary from Barclays Research said the ECB's inflation projections coming out the same day are expected to contain significant downward revisions.

Many analysts expect the bank to cut its main interest rate from its current record low of 0.25 per cent.

Commodities were mixed with June crude up 19 cents at US$102.66 a barrel, July copper declined three cents to US$3.14 a pound while August bullion rose 50 cents to US$1,244.50 an ounce.

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