CANADA FX DEBT-C$ weakens as wider Canada-U.S. yield spreads weigh

(Add analyst quotes and details on bond spreads; updates
    * Canadian dollar ends at C$1.3417, or 74.53 U.S. cents
    * Bond prices higher across a flatter yield curve

    By Fergal Smith
    TORONTO, Dec 19 (Reuters) - The Canadian dollar weakened to
a near three-week low against its U.S. counterpart on Monday as
the recent drop in Canadian yields below U.S. Treasuries
weighed, with the market bracing for divergence in monetary
policy between the United States and Canada.
    The loonie fell 1.2 percent last week after the Federal
Reserve raised U.S. interest rates and signaled increases would
follow at a faster pace next year.
    "I think what you have seen over the last week or so has
been a bit of catch-up from the Canadian dollar in terms of rate
differentials, which had moved against it since the (U.S.)
election," said Ian Gordon, FX strategist at Bank of America
Merrill Lynch.
    Canada's 2-year yield has fallen more than 15 basis points
further below its U.S. equivalent since before the election,
widening to a spread of -42.2 basis points.
    Strategists expect the spread to stretch to as much as -80
basis points by the end of 2017 as the Bank of Canada shows no
desire to follow Fed increases.
    The Canadian dollar ended at C$1.3417 to the
greenback, or 74.53 U.S. cents, weaker than Friday's close of
C$1.3344, or 74.94 U.S.
    The currency's strongest level of the session was C$1.3319,
while it touched its weakest since Dec. 1 at C$1.3423.
    "The Canadian dollar had been one of the best performers
since the election. It arguably had the most catching up to do
in terms of the (U.S.) dollar rally," Gordon said.
    Higher prices for oil, one of Canada's exports, had helped
support the loonie in recent weeks after OPEC cut supply for the
first time in eight years.
    U.S. crude prices settled up 22 cents at $52.12 a
    The U.S. dollar was underpinned by expectations that
a fiscal expansion planned by U.S. President-elect Donald Trump
will quicken inflation and lead to a faster pace of interest
rates hikes. 
    Canadian government bond prices were higher across a flatter
yield curve in sympathy with U.S. Treasuries. The two-year
 rose 4 Canadian cents to yield 0.801 percent and the
benchmark 10-year climbed 39 Canadian cents to yield
1.787 percent.
    On Thursday, the 10-year yield touched its highest since
June 2015 at 1.859 percent.
    Bank of Canada Governor Stephen Poloz said rising global
protectionism could drive up the cost of goods and cause job
losses, but dismissed the conclusion that Canadian exports will
suffer under a Trump administration. 

 (Reporting by Fergal Smith, editing by G Crosse)