/www.fxserver.com/ TORONTO, Aug 21 - The Canadian dollar ended substantially higher against the U.S. dollar on Wednesday after Prime Minister Jean Chretien said he would step down in 2004, ending political infighting in the ruling Liberal Party.
But analysts said the Canadian dollar could have rallied more had Chretien announced an earlier retirement date.
The Canadian dollar finished at C$1.5576 to the U.S. dollar, or 64.20 U.S. cents, up from the previous North American close of C$1.5666, or 63.83 U.S. cents.
The currency rose against the greenback for most of the session after Bank of Canada data showed that domestic inflation was tame.
But, after the surprise announcement that Chretien would step down in February 2004, the Canadian dollar weakened about 20 basis points to C$1.5585 as investors were somewhat disappointed that his exit would not be earlier.
"If he said 'I'm leaving in February 2003', I think you would have seen the Canadian dollar rally," said Paul Briggs, a currency trader at Investors Bank & Trust.
Chretien, facing an increasingly fractious party, said he hoped his surprise decision would help heal a rift between his supporters and those of arch-rival Paul Martin, the former finance minister.
"The Chretien news stirred things up a little (for the currency) but not in a big way. There is still no real threat to the sound fiscal policies that the government has been following for almost a decade," said Rob Palombi, senior analyst at Standard & Poor's.
The prime minister sacked the popular Martin, who served as finance minister for nine years until June, and is currently the favorite to take over the top government job.
The Canadian dollar tumbled in June on news of the finance minister's departure as dealers feared the policies championed by Martin, who is credited as being the architect of Canada's sound economy, would not be continued.
But Martin's policies remained the same under his replacement, John Manley, and that has soothed investor fears.
But Palombi said Chretien's announcement also could be interpreted as slightly negative news for the currency.
"Chretien is delaying his departure for almost two years and that gives other leadership hopefuls a chance to prove themselves," he said.
"The longer it takes for Chretien to retire, the worse the odds are for Martin in terms of being able to easily replace Chretien," Palombi added.
Thinner than usual volumes and a stronger showing on equity markets have also contributed to the currency's rise, analysts said.
Earlier, Statistics Canada said Canada's annual inflation rate was 2.1 percent in July, up from 1.3 percent in June. That was well above the 1.8 percent predicted by market analysts.
But CPI-X, the Bank of Canada's annual core inflation rate -- which strips out eight volatile components including tobacco and gasoline -- was 2.1 percent, unchanged from June.
The measure is something that the bank closely monitors and uses in its policy decisions.
The Bank of Canada has raised interest rates three times this year to keep the economy in check and will next announce rates on Sept. 4.
The Bank of Canada will likely take small comfort in this report," said John Anania, assistant chief economist at Royal Bank of Canada.
"With standard measures of the output gap suggesting that excess capacity is all but gone and inflation readings suggesting that excess demand could in fact be building, only external economic conditions would dissuade the bank from hiking rates on Sept. 4."
Meanwhile, bond prices slid lower though they did not react in either direction to Chretien's news. Domestic bonds tracked U.S. treasuries after a trio of U.S. Federal Reserve officials stomped on hopes for a U.S. rate cut.
Canada's two-year bond slid 16 Canadian cents to C$100.20 to yield 3.381 percent, while the 10-year bond shed 30 Canadian cents to C$101.01 to yield 5.116 percent.
The yield spread between the two-year and 10-year bond moved to 173.5 basis points from 178.5 basis points at the previous close.
Canada's 30-year bond, due 2029, lost 39 Canadian cents to C$102.81 to yield 5.547 percent. In the United States, the 30-year treasury yielded 5.012 percent.
The three-month when-issued T-bill yielded 2.88 percent, up from 2.85 percent at the previous close.