CANADA FX DEBT-C$ adds to 14-month high as oil rallies, greenback slides

    * Canadian dollar at C$1.2611, or 79.30 U.S. cents
    * Loonie touches its strongest since May 2016 at C$1.2581
    * Bond prices mixed across the yield curve
    * Canada-U.S. 10-year spread touches its narrowest in 1-year

    TORONTO, July 18 (Reuters) - The Canadian dollar
strengthened on Tuesday against its U.S. counterpart to a fresh
14-month high, boosted by higher oil prices, while the greenback
lost ground against a basket of major currencies.
    The U.S. dollar        sank to a 10-month low as the latest
collapse of President Donald Trump's efforts to deliver a new
healthcare bill added to worries about the pace of U.S. growth.
    Prices of oil, one of Canada's major exports, rose as demand
soaked up some of the surplus supplies from Organization of the
Petroleum Exporting Countries and the United States.
    U.S. crude        prices were up 1.69 percent at $46.8 a
    At 9:11 a.m. ET (1311 GMT), the Canadian dollar          was
trading at C$1.2611 to the greenback, or 79.30 U.S. cents, up
0.7 percent.
    The currency's weakest level was C$1.2702, while it touched
its strongest since May 2016 at C$1.2581.
    Gains for the loonie came after the Bank of Canada raised
interest rates last week for the first time in seven years and
signaled it will hike again over the coming months. The currency
has gained nearly 7 percent since the central bank turned
hawkish in June.
    The central bank's policy rate sits at 0.75 percent.
    Canadian government bond prices were mixed across the yield
curve, with the two-year            down 1 Canadian cent to
yield 1.205 percent and the 10-year             flat to yield
1.895 percent.
    The gap between the 10-year yield and its U.S. counterpart
narrowed by 2.5 basis points to a spread of -38.9 basis points,
its narrowest since July 5, 2016.
    Lending to Canadian small businesses picked up in May on
stronger activity in the agriculture and consumer sectors, data
showed, suggesting companies were becoming more willing to
invest two years after a slump in oil prices hit the economy.
    Data on Canada's manufacturing sales for May is due on
Wednesday, while retail sales data for May and the June
inflation report are due out on Friday.         

 (Reporting by Fergal Smith; Editing by Nick Zieminski)