CANADA FX DEBT-C$ hits 2-month low as December data disappoints

 (Adds strategist quotes and details throughout; updates prices)
    * Canadian dollar at C$1.2713, or 78.66 U.S. cents
    * Loonie touches its weakest since Dec. 22 at C$1.2760
    * Bond prices rise across the yield curve
    * Canada-U.S. 2-year spread touches its widest since June 14

    By Fergal Smith
    TORONTO, Feb 22 (Reuters) - The Canadian dollar weakened to
a two-month low against its U.S. counterpart on Thursday after a
surprise drop in domestic retail sales supported expectations
for the Bank of Canada to leave interest rates on hold next
    At 4:00 p.m. EST (2100 GMT), the Canadian dollar         
was trading 0.1 percent lower at C$1.2713 to the greenback, or
78.66 U.S. cents.
    The currency's strongest level of the session was C$1.2670,
while it touched its weakest since Dec. 22 at C$1.2760.
    Canadian retail sales fell by 0.8 percent in December from
November as a pullback at electronics stores offset higher
purchases of new cars, Statistics Canada said. Analysts had
forecast an increase of 0.2 percent.             
    That followed recent data showing manufacturing sales and
wholesale trade also dropped in December.
    "The numbers have been slightly softer but that has been
consistent with the view that the BoC has had that things would
slow down at the end of the second half of the year," said
Alvise Marino, a foreign exchange strategist at Credit Suisse in
New York.
    The Bank of Canada expects growth to slow to a 2.2 percent
pace in 2018 after a projected 3.0 percent in 2017.
    The central bank raised interest rates in January for the
third time since July. But money markets expect the benchmark
rate to be left unchanged at 1.25 percent when the bank makes
its next rate decision on March 7.           
    "Risk assets have turned a lot more uncertain, and the
Canadian dollar tends to be pretty strongly correlated to risk
assets," Marino said.    
    The loonie has fallen 3.5 percent since stocks on Wall
Street lurched lower earlier this month.    
    The price of oil, one of Canada's major exports, was boosted
by data showing a surprise draw in U.S. crude inventories. U.S.
crude        prices settled 1.8 percent higher at $62.77 a
    Canadian government bond prices were higher across the yield
curve, with the two-year            up 9.5 Canadian cents to
yield 1.8 percent and the 10-year             rising 42 Canadian
cents to yield 2.301 percent.
    The gap between Canada's 2-year yield and its U.S.
equivalent widened by 3.2 basis points to a spread of -45.4
basis points, its widest since June 14.    
    Canada's inflation report for January is due on Friday.   

 (Reporting by Fergal Smith; Editing by Jonathan Oatis and
Meredith Mazzilli)