CANADA FX DEBT-Canadian dollar hits five-week high as Mideast hopes offset CPI data

* Canadian dollar gains 0.4% against the greenback

* Touches its strongest since March 13 at 1.3636

* Price of oil settles 6.9% higher

* Annual inflation rate rises to 2.4% in March

By Fergal Smith

TORONTO, April 20 (Reuters) - The Canadian dollar strengthened to a five-week high against its U.S. counterpart on Monday as investors remained hopeful of a diplomatic solution to the war in the Middle East and despite domestic data that showed inflation heating up less than expected.

The loonie was trading 0.4% higher at 1.3640 per U.S. dollar, or 73.31 U.S. cents, after touching its strongest intraday level since March 13 at 1.3636.

"The market appears to be keeping an optimistic tone with respect to a potential deal between the U.S. and Iran," said George Davis, chief technical strategist at RBC Capital Markets. "This has tempered demand for USD versus CAD." The safe-haven U.S. dollar reversed earlier gains against a basket of major currencies which it had made following renewed tensions between Washington and Tehran over the weekend. Stocks on Wall Street largely held on to last week's strong gains. Still, traffic through the Strait of Hormuz remained largely halted which helped lift the price of oil, one of Canada's major exports. U.S. crude futures settled 6.9% higher at $89.61 a barrel.

Canada's annual inflation rate rose to 2.4% in March from 1.8% in February as higher crude oil costs drove up gasoline prices. Analysts had expected inflation to climb to 2.6%.

"The jump in headline inflation wasn't quite as high as expected, and core measures continued to show little sign of inflationary pressure outside of the surge in fuel prices," Andrew Grantham, a senior economist at CIBC Capital Markets, said in a note.

"We continue to see the Bank of Canada holding interest rates at their current level throughout 2026." A survey from the central bank showed that Canadian business sentiment had started to rise before the war, but a smaller sample of firms exposed to the conflict later indicated many expected higher input prices.

Canadian bond yields edged lower across the curve even as yields across much of the U.S. curve moved higher. The Canadian 2-year was down 1.4 basis points at 2.762%. (Reporting by Fergal Smith, editing by Deepa Babington)