CANADA FX DEBT-C$ rises vs weaker greenback as investors weigh inflation data

    * Canadian dollar at C$1.2355, or 80.94 U.S. cents
    * Canada's inflation rate falls to 1.9 percent in December
    * Bond prices higher across the yield curve
    * Canada-U.S. 2-year spread widens by 4.3 basis points

    By Fergal Smith
    TORONTO, Jan 26 (Reuters) - The Canadian dollar strengthened
against its U.S. counterpart on Friday as the greenback broadly
fell, while investors also digested domestic data showing an
expected drop in headline inflation but an uptick in underlying
    At 9:13 a.m. EST (1413 GMT), the Canadian dollar         
was trading 0.2 percent higher at C$1.2355 to the greenback, or
80.94 U.S. cents.
    The currency traded in a range of C$1.2298 to C$1.2391. On
Thursday, the loonie touched a four-month high at C$1.2283.    
     Canada's annual inflation rate dipped to 1.9 percent in
December from 2.1 percent in November as higher food costs were
offset by a drop in gasoline prices, data from Statistics Canada
showed. But two out of three of the Bank of Canada's measures of
core inflation rose.             
    "For a data-dependent central bank this supports staying on
a hike path," said Derek Holt, head of capital markets economics
at Scotiabank.
    Earlier this month the Bank of Canada raised its benchmark
rate to 1.25 percent, its third hike since July.
    Chances of another rate hike in March were little changed
after the inflation report at 23 percent, data from the
overnight index swaps market showed.           
    The U.S. dollar        fell against a basket of major
currencies, weighed by comments this week by senior U.S.
officials that were interpreted by some investors as favoring a
weak currency.                 
     U.S. crude        prices were little changed at $65.48 a
barrel. Oil is one of Canada's major exports.             
    Canadian government bond prices were higher across the yield
curve, with the two-year            up 3.5 Canadian cents to
yield 1.807 percent and the 10-year             rising 8
Canadian cents to yield 2.255 percent.
    The gap between Canada's 2-year yield and its U.S.
counterpart widened by 4.3 basis points to a spread of -30.5
basis points, its widest since Dec. 12.
    Data showed that U.S. economic growth unexpectedly slowed in
the fourth quarter as the strongest pace of consumer spending in
three years resulted in a surge in imports.             

 (Reporting by Fergal Smith; Editing by Meredith Mazzilli)