Oct. 19 (Bloomberg) -- Canada's dollar rose to the highest since June 1974 after a government report showed inflation accelerated in September, reinforcing expectations the Bank of Canada will keep interest rates steady this year.

``Another number that will keep the Bank of Canada firmly on the sidelines,'' said Firas Askari, head of foreign exchange trading at BMO Capital Markets in Toronto. ``It'll give the loonie a one-way ride,'' to record highs, he said.

Canada's dollar, nicknamed the loonie after the image of the national bird on the one-dollar coin, is the best performer against the U.S. dollar this year among the most actively traded currencies. It has gained 19.8 percent since December, as prices of the nation's commodity exports surged and the U.S. dollar weakened. Canada's dollar reached parity with the U.S. dollar on Sept. 20 for the first time since 1976.

The currency rose 0.7 percent to $1.0344 at 8:24 a.m. in Toronto. It climbed as high as $1.0358. One U.S. dollar buys 96.67 Canadian cents.

Canadian inflation accelerated at the fastest pace since May 2006 in September as gas prices rebounded. The consumer price index gained 2.5 percent from a year earlier, compared with a 1.7 percent rate in August, as gasoline climbed 13 percent, Statistics Canada said today in Ottawa. On a monthly basis, prices rose 0.2 percent from August.

The Bank of Canada said yesterday inflation will return to its 2 percent target sooner than expected, as tighter credit conditions and an appreciating currency damp growth, and risks may ``tilt'' toward even slower price increases. The bank kept its key lending rates unchanged at 4.50 percent on Oct. 16.

Surging Oil

Investors trimmed bets that the Bank of Canada will cut the borrowing cost to weather the U.S. slowdown after the domestic economy showed signs of strength. The U.S. is Canada's largest trading partner.

``The Bank of Canada will likely look through these numbers in view of its position yesterday that inflation will peak at 3 percent this year before falling back more quickly,'' said Shaun Osborne, chief currency strategist at TD Securities in Toronto. ``The reaction to this number has at least reestablished a stronger link between the currency and surging oil prices.''

Crude oil breached $90 a barrel in New York for the first time as the dollar traded near a record low against the euro, enhancing the appeal of commodities as an investment. Commodities account for about half of Canada's exports.

A lower dollar makes oil cheaper in countries that use other currencies. In U.S. dollars, West Texas Intermediate, the New York-traded crude-oil benchmark, is up 46 percent this year. Oil is up 35 percent in euros, 40 percent in British pounds and 42 percent in yen.

The yield on the benchmark two-year Canadian government bond rose 2 basis points, or 0.02 percentage point, to 4.25 percent. The price of the 4.25 percent security maturing in December 2009 fell 4 cents to C$100. Bond yields move inversely to prices.

To contact the reporter on this story: Haris Anwar in Toronto at hanwar2@bloomberg.net

Last Updated: October 19, 2007 08:32 EDT