CANADA FX DEBT-C$ weakens as bank ratings downgrades offsets oil rally

    * Canadian dollar at C$1.3736, or 72.80 U.S. cents
    * Bond prices higher across the yield curve
    * 2-year spread versus Treasuries hits widest gap in 10

    TORONTO, May 11 (Reuters) - The Canadian dollar weakened on
Thursday against its U.S. counterpart as a ratings downgrade for
the country's major banks offset higher oil prices.
    Moody's Investor Service on Wednesday downgraded the
long-term ratings for six Canadian banks, pointing to rising
domestic consumer debt and the country's elevated housing prices
that leaves lenders more vulnerable to a slowdown in the
Canadian economy.             
    Speculators had already become bearish on the Canadian
dollar in the face of depressed oil prices and a more uncertain
trade outlook with the United States. The trade where investors
selling Canadian assets on the expectation that the country's
economy will suffer if a housing bubble pops has been called
"The Great White Short."             
    U.S. crude        prices were up 1.20 percent at $47.9 a
barrel after a fall in U.S. inventories and a
bigger-than-expected cut in Saudi supplies to Asia helped
tighten the oil market.
    Oil is one of Canada's major exports.
    At 9:25 a.m. ET (1325 GMT), the Canadian dollar          was
trading at C$1.3736 to the greenback, or 72.80 U.S. cents, down
0.6 percent, according to Reuters data.
    The currency traded in a range of C$1.3653 to C$1.3770. On
Friday it hit its weakest in 14 months at C$1.3793.
    Canadian government bond prices were higher across the yield
curve, with the two-year            up 1.5 Canadian cents to
yield 0.714 percent and the 10-year             rising 19
Canadian cents to yield 1.618 percent.
    The 2-year yield fell 2.3 basis points further below its
U.S. equivalent to a spread of -65.6 basis points, its widest
gap since 2007.
    The market is expecting the Federal Reserve to raise
interest further next month but has largely given up on
prospects of a hike this year from the Bank of Canada.

 (Reporting by Fergal Smith; Editing by Bernard Orr)