* Canadian dollar rises 0.1 percent against the greenback * Canada's annual inflation rate falls to 1.7 percent * Price of U.S. oil rallies 1.2 percent * Bond prices rise across the yield curve * Canada-U.S. 2-year spread widens by 2.1 basis points By Fergal Smith TORONTO, Dec 19 (Reuters) - The Canadian dollar edged higher against its U.S. counterpart on Wednesday as oil prices and stocks rose, but the currency pared gains after domestic inflation data supported bets for the Bank of Canada to stay sidelined over the coming months. Lower gas prices pulled Canada's annual inflation rate in November down to 1.7 percent, the first time in 10 months it has been below the Bank of Canada's 2.0 percent target, Statistics Canada data indicated. Analysts had forecast the rate would fall to 1.8 percent from the 2.4 percent seen in October. "The key is that the average of the three core measures slipped again to 1.9 percent," said Derek Holt, vice president of capital markets economics at Scotiabank. "This was more than just gas prices, there was underlying softness in the basket." Chances of a Bank of Canada interest rate hike in March dropped to 13 percent from 17 percent before the data, the overnight index swaps market showed. Bets on further tightening had already been slashed after a dovish policy announcement earlier this month from the central bank. Expectations that the Federal Reserve will signal on Wednesday fewer rate hikes given the turmoil in financial markets and rising fears of a recession, helped boost stocks. The price of oil, one of Canada's major exports, stabilized after one of its biggest falls in years, but remained under pressure from oversupply and concern that a slowing global economy would depress demand. U.S. crude prices were up 1.2 percent at $46.79 a barrel. At 9:10 a.m. (1410 GMT), the Canadian dollar was trading 0.1 percent higher at 1.3458 to the greenback, or 74.31 U.S. cents. The currency, which hit on Tuesday a one-and-a-half-year low at 1.3497, traded in a range of 1.3434 to 1.3482. Canadian government bond prices were higher across the yield curve, with the two-year up 4.5 Canadian cents to yield 1.898 percent and the 10-year rising 19 Canadian cents to yield 1.993 percent. The gap between Canada's 2-year yield and its U.S. equivalent widened by 2.1 basis points to a spread of 75 basis points in favor of the U.S. bond. (Reporting by Fergal Smith; Editing by David Gregorio)
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