CANADA FX DEBT-C$ posts 2-year high vs weaker greenback as oil rallies

 (Add analyst quotes and details throughout, updates prices)
    * Canadian dollar at C$1.2383, or 80.76 U.S. cents
    * Loonie touches its strongest since June 2015 at C$1.2336
    * Bond prices mixed across flatter yield curve
    * Canada-U.S. 2-year spread widens to 5.5 basis points

    By Fergal Smith
    TORONTO, Sept 5 (Reuters) - The Canadian dollar strengthened
to a two-year high against its U.S. counterpart on Tuesday as
oil rallied and the greenback lost ground broadly, while
investors weighed prospects of a Bank of Canada interest rate
hike as early as this week.
    Prices of oil, one of Canada's major exports, climbed as the
gradual restart of refineries in the Gulf of Mexico that were
shut by Hurricane Harvey raised demand for crude.      
    U.S. crude        prices settled 2.9 percent higher at
$48.66 a barrel.
    The U.S. dollar        fell against a basket of major
currencies that included the safe-haven yen, pressured by North
Korea's largest nuclear test and a Federal Reserve official's
comments about low U.S. inflation.             
    North Korea on Sunday conducted its sixth nuclear test,
which it said was of an advanced hydrogen bomb for a long-range
    "The U.S. dollar is generally weak," said Daniel Katzive,
head of FX strategy North America. "Anticipation that the Bank
of Canada could hike as soon tomorrow is providing some
additional support (for the loonie)."       
    On Wednesday, the Bank of Canada will likely announce it
will leave rates unchanged, a Reuters poll released on Friday
showed. The bank will probably wait until October to raise them,
according to the survey. 
    Still, the chances of a hike this week have climbed to
nearly 40 percent, the overnight index swaps market indicated,
from around 20 percent before data on Thursday showing Canada's
economy expanded in the second quarter at its fastest pace in
nearly six years.            
    The central bank raised rates in July for the first time in
nearly seven years. Its policy rate stands at 0.75 percent.
    At 4 p.m. (2000 GMT), the Canadian dollar          was
trading at C$1.2383 to the greenback, or 80.76 U.S. cents, up
0.3 percent.
    The currency's weakest level of the session was C$1.2416,
while it touched its strongest since June 2015 at C$1.2336.
    Canadian government bond prices were mixed across a flatter
yield curve as tensions over North Korea fed investor demand for
safe-haven assets, including longer-dated government bonds.
    The two-year            price dipped 1.5 Canadian cents to
yield 1.349 percent and the 10-year             climbed 47
Canadian cents to yield 1.861 percent.
    The two-year yield climbed 5.5 basis points above its U.S.
equivalent, the widest gap for the spread since May 2015.
    Canada's trade data for July is also due on Wednesday, while
the August employment report is awaited on Friday.         

 (Reporting by Fergal Smith; Editing by W Simon and Peter