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 per cent in May, below forecasts for 1.5 per cent, pushing it further away from the Bank of Canada's two-per-cent target. The central bank's three measures of core inflation remained subdued.                  

"It 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 per cent from one-in-three before the inflation report, data from the overnight index swaps market showed.           

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.             

Analysts expect policymakers to stay hawkish amid concern that rates have been low too long.              

At 4 p.m. ET, the Canadian dollar was trading at $1.3267 to the greenback, or 75.37 cents US, down 0.2 per cent. It traded in a range of $1.3211 to $1.3307. For the week, the loonie lost 0.4 per cent.

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 settled 27 cents US higher at US$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 up seven cents to yield 0.898 per cent and the 10-year rising 19 cents to yield 1.479 per cent.

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.