CANADA FX DEBT-Loonie falls as investors weigh risk of surprise rate cut

 (Adds strategist quotes, details throughout; updates prices)
    * Canadian dollar falls 0.3% against the greenback
    * Price of U.S. oil increases 2.4%
    * Loonie touches its strongest intraday since Aug. 14 at
    * Canada's curve inverts by the most since May 1999

    By Fergal Smith
    TORONTO, Aug 27 (Reuters) - The Canadian dollar weakened
against its U.S. counterpart on Tuesday, with the currency
pulling back from a near two-week high earlier in the session as
investors weighed the prospect of an unexpected interest rate
cut next week by the Bank of Canada.
    At 4:27 p.m. (2027 GMT), the Canadian dollar          was
trading 0.3% lower at 1.3296 to the greenback, or 75.21 U.S.
cents. The currency touched its strongest intraday level since
Aug. 14 at 1.3225.
    "There is a lot of chatter about Canadian dollar selling
flows," said Adam Button, chief currency analyst at ForexLive.
"The Bank of Canada is one week away now and that has traders
thinking about the possibility for a surprise rate cut."
    Chances of an interest rate cut at the central bank's Sept.
4 policy announcement have climbed to 25% from less than 10% at
the beginning of the month.    
    "There is a strong focus (from the Bank of Canada) on trade
risk and it has obviously gone in the wrong direction," Button
    The bank highlighted last month the risks trade wars pose to
the global economy as it left its benchmark interest rate on
hold at 1.75%.             
    At the end of July, the Federal Reserve eased interest rates
for the first time since 2008.
    The loonie weakened on Tuesday even as the price of oil, one
of Canada's major exports, gained ground. U.S. crude oil futures
       settled 2.4% higher at $54.93 a barrel.
    Canadian government bond prices were higher across a flatter
yield curve in sympathy with U.S. Treasuries. The two-year
           rose 10.5 Canadian cents to yield 1.341% and the
10-year             was up 87 Canadian cents to yield 1.125%.
    Canada's 10-year yield fell 21.6 basis points below the
2-year yield, which was the curve's biggest inversion since May

 (Reporting by Fergal Smith; EDiting by Steve Orlofsky and
Sandra Maler)