CANADA FX DEBT-C$ nears 2-week high despite dip in retail sales

    * Canadian dollar at C$1.3017, or 76.82 U.S. cents
    * Price of U.S. oil rises 2.1 percent
    * Bond prices higher across flatter yield curve
    * Gap between 2- and 10-year yields hits narrowest in 11

    TORONTO, Aug 22 (Reuters) - The Canadian dollar strengthened
to a nearly two-week high against its U.S. counterpart on
Wednesday, as higher oil prices and broad declines for the
greenback offset domestic data showing a drop in retail sales in
    At 9:13 a.m. EDT (1313 GMT), the Canadian dollar         
was trading 0.2 percent higher at C$1.3017 to the greenback, or
76.82 U.S. cents. The currency touched its strongest level since
Aug. 9 at C$1.3006.
    Canadian retail trade dipped 0.2 percent in June, short of
the 0.1 percent gain that economists had predicted, as sales at
gasoline stations and motor vehicle and parts dealers fell,
Statistics Canada said.             
    But the dip in sales, which compared with an upwardly
revised 2.2 percent increase in the prior month, had little
impact on money market expectations for a Bank of Canada
interest rate increase as soon as next month. Chances of a
September hike, which were boosted on Friday by
hotter-than-expected inflation data, are about 40 percent, the
overnight index swaps market showed.           
    The price of oil, one of Canada's major exports, was boosted
by a tightening outlook for fuel markets in the coming months.
U.S. crude        prices were up 2.1 percent at $67.23 a barrel.
    The U.S. dollar        weakened against a basket of other
major currencies as markets awaited Federal Reserve minutes and
news of U.S.-China trade talks.                         
    Canada runs a current account deficit so its economy could
be hurt if the flow of trade or capital slows. The country is in
talks with the United States and Mexico to revamp the North
American Free Trade Agreement.
    U.S. and Mexican officials postponed ministerial talks
aiming for a breakthrough in talks on NAFTA until Wednesday,
although one member of the incoming Mexican government met U.S.
officials on Tuesday.             
    Canadian government bond prices were higher across a flatter
yield curve in sympathy with U.S. Treasuries. The 10-year
            rose 18 Canadian cents to yield 2.237 percent.
    The gap between the 2-year and 10-year yields shrank by 1.3
basis points to a spread of 14.6 basis points, its narrowest
since November 2007.

 (Reporting by Fergal Smith; Editing by Steve Orlofsky)