CANADA FX DEBT-C$ hits 2-month low as oil drops below $50

    * Canadian dollar at C$1.3504, or 74.05 U.S. cents
    * Loonie touches its weakest since Dec. 29 at C$1.3535
    * Bond prices lower across the yield curve

    TORONTO, March 9 (Reuters) - The Canadian dollar weakened on
Thursday to a fresh two-month low against the greenback as U.S.
crude oil prices traded below $50 a barrel and the gap between
U.S. and Canadian yields widened.
    Prices of oil, one of Canada's major exports, extended the
biggest falls this year as record U.S. crude inventories kept
sentiment weak, pointing to a global glut despite supply cuts.
    U.S. crude        prices were down 1 percent at $49.76 a
    Increased expectations that the Federal Reserve will raise
interest rates next week has added to recent pressure on the
Canadian dollar. In contrast, the Bank of Canada is expected to
wait until 2018 before raising rates.             
    Canada's 5-year yield fell 1.7 basis points further below
its U.S. equivalent to a spread of -86.8 basis points, its
widest gap since Nov. 23. 
    Stronger-than-expected U.S. non-farm payroll numbers, due on
Friday, could help cement expectations the Fed would hike.
Canadian jobs data for February is also due on Friday.
    At 9:12 a.m. ET (1412 GMT), the Canadian dollar          was
trading at C$1.3504 to the greenback, or 74.05 U.S. cents,
slightly weaker than Wednesday's close of C$1.3494, or 74.11
U.S. cents.
    The currency's strongest level of the session was C$1.3482,
while it touched its weakest since Dec. 29 at C$1.3535.
    Canadian industries ran at 82.2 percent of capacity in the
fourth quarter of 2016, up 0.6 percentage points from the third
quarter, Statistics Canada said.             
    In other domestic data, new home prices climbed 3.1 percent
on a year-over-year basis in January.             
    Canadian government bond prices were lower across a steeper
yield curve as investors weighed comments from European Central
Bank President Mario Draghi.
    The two-year            dipped 0.5 of a Canadian cent to
yield 0.823 percent and the 10-year             fell 15 Canadian
cents to yield 1.794 percent.

 (Reporting by Fergal Smith; Editing by Nick Zieminski)