CANADA FX DEBT-C$ gains as accelerating inflation adds to rate hike bets

 (Adds analyst quote, details on activity; updates prices)
    * Loonie strengthens 0.8 pct vs greenback
    * Inflation rate rises to 3.0 percent in July
    * Price of U.S. oil increases 0.7 percent
    * Canada-U.S. 2-year spread narrows by 3.1 basis points

    By Fergal Smith
    OTTAWA, Aug 17 (Reuters) - The Canadian dollar strengthened
against its U.S. counterpart on Friday after data showing a
surge in domestic inflation triggered increased bets on another
Bank of Canada interest rate hike as soon as September.
    Canada's annual inflation rate surged to 3.0 percent in
July, its highest in nearly seven years, versus 2.5 percent the
previous month as energy prices climbed. Economists had forecast
2.5 percent annual inflation.             
    At 3:14 p.m. EDT (1914 GMT), the Canadian dollar         
was trading 0.8 percent higher at C$1.3058 to the greenback, or
76.58 U.S. cents. The currency traded in a range of C$1.3053 to
    "With that size of a shock, (the Canadian dollar) probably
should have moved more," said Greg Anderson, global head of
foreign exchange strategy at BMO Capital Markets in New York.
"This really does raise the possibility of the Bank of Canada
raising rates in September again."
    The central bank raised its benchmark interest rate in July
for the fourth time in a year, to 1.50 percent. Chances of
another hike next month climbed to about 25 percent from less
than 20 percent on Thursday, the overnight index swaps market
    "Today's CPI figures are yet another data point that
supports the Bank of Canada's assessment that the economy is
operating close to capacity and further rate hikes will be
needed," said Ranko Berich, head of market analysis at Monex
Canada and Monex Europe.
    The CPI data came a day after a report that showed Canadian
factory sales grew by 1.1 percent in June from May.             
    The loonie had lost ground against the U.S. dollar       
earlier in the week due to volatility in emerging market
currencies. But it was on track to end the week 0.6 percent
    Mexico's economy minister, Ildefonso Guajardo, said he hopes
to conclude by the middle of next week outstanding bilateral
issues with the United States surrounding the renegotiation of
the North American Free Trade Agreement. Canada is also part of
the NAFTA trade pact.             
    U.S. crude oil futures        settled 0.7 percent higher.
Oil is one of Canada's major exports.
    Canadian government bond prices were lower across much of a
flatter yield curve, with the two-year            down 4.5
Canadian cents to yield 2.103 percent.
    The gap between Canada's 2-year yield and its U.S.
counterpart narrowed by 3.1 basis points to a spread of 51.0
basis points in favor of the U.S. bond.

 (Additional reporting by James Thorne;
Editing by Susan Thomas and Dan Grebler)