TORONTO, June 13 (Reuters) – Canada’s main stock market tumbled back into correction territory on Monday and the dollar weakened against its U.S. counterpart as investors raised bets on how high central banks would lift interest rates to tackle inflation.

The Toronto Stock Exchange’s S&P/TSX composite index (.GSPTSE) ended down 2.6% at 19,742.56, leaving it 10.6% below the record closing high it notched up in March.

A correction is confirmed when an index closes 10% below its record closing high. The TSX did that on May 11 and May 12 but then rallied.

The Canadian dollar was trading 0.8% lower at 1.2888 to the U.S. currency, or at 77.59 U.S. cents, as the safe-haven U.S. dollar climbed against a basket of major currencies. It touched its weakest since May 19 at 1.2893.

Wall Street’s benchmark S&P 500 (.SPX) also ended sharply lower after hot U.S. inflation data on Friday left investors nervous that the Federal Reserve would not be able to control price pressures without triggering a recession. read more

The Fed is due to make an interest rate decision on Wednesday.

“The central banks are going out of their way to make it apparent that they are not afraid to raise interest rates perhaps more aggressively than people had been assuming up to now,” said Michael Sprung, president at Sprung Investment Management.

Money markets see about a 75% chance that the Bank of Canada would raise interest rates by three-quarters of a percentage point next month, which would be the biggest hike since August 1998, and expect rates to peak at about 3.9% next year.

Just two weeks ago, investors expected a so-called terminal rate of 3%.

“I think what we are beginning to see is maybe the beginning of some capitulation in the market,” Sprung said.

The Toronto market has fallen less than some other major benchmarks this year, helped by its heavy weighting in resource shares.

But the energy sector gave back some recent gains on Monday and fell 3.1%, while the materials group, which includes precious and base metal miners and fertilizer companies, tumbled 4.8% as gold and copper prices fell.

Technology shares, which are particularly sensitive to higher rates, lost 3.6%, with shares of cloud-based commerce platform company Lightspeed Commerce Inc (LSPD.TO) down 14.4%.

Canadian bond yields were higher across the curve, tracking the move in U.S. Treasuries. The 10-year touched its highest since May 2010 at 3.551% before dipping to 3.514%, up 16.1 basis points on the day.

Editing by Tomasz Janowski and Deepa Babington

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