CANADA FX DEBT-C$ hits two-month low as oil losses extend

 (Adds portfolio manager quotes and details throughout; updates
    * Canadian dollar at C$1.2996, or 76.95 U.S. cents
    * Loonie touches its weakest since March 21 at C$1.3022
    * The price of U.S. oil falls 2.1 percent
    * Bond prices higher across the yield curve

    By Fergal Smith
    TORONTO, May 28 (Reuters) - The Canadian dollar weakened to
a more than two-month low against its U.S. counterpart on Monday
as oil prices fell and investors bet that the Bank of Canada
will lag the Federal Reserve with interest rate hikes.
    U.S. crude        prices were down 2.1 percent at $66.47 a
barrel as Saudi Arabia and Russia said they may increase
supplies while U.S. production gains show no sign of slowing.
    The decline has left oil, one of Canada's major exports,
nearly 9 percent below last week's nearly 3-1/2-year high at
    A slowdown in the Canadian real estate market and potential
widening of the gap between U.S. and Canadian interest rates are
adding to pressure on the loonie, said Michael White, portfolio
manager at Picton Mahoney Asset Management.
    "We have positioning in place that argues for a lower
Canadian dollar from here," White said.
    The Bank of Canada will announce an interest rate decision
on Wednesday. It will probably hold interest rates steady as
indebted consumers and uncertain trade policy necessitate
caution, a Reuters poll predicted.             
    The central bank's benchmark policy rate sits at 1.25
percent, while the Fed's is in a target range of 1.50 percent to
1.75 percent. Money markets expect the Fed to hike next month.
    Canada's Foreign Affairs Minister Chrystia Freeland will
visit Washington this week in another bid to help unblock talks
on the North American Free Trade Agreement, a spokesman said.
    Canada sends about 75 percent of its exports to the United
States so its economy could be hurt if NAFTA collapses.
    At 3:41 p.m. EDT (1941 GMT), the Canadian dollar         
was trading 0.1 percent lower at C$1.2996 to the greenback, or
76.95 U.S. cents. The currency touched its weakest since March
21 at C$1.3022.
    Activity was lighter than usual in the foreign exchange
market due to holidays in Britain and the United States.
    Investors may also weigh this week prospects for the Trans
Mountain oil pipeline as a hard deadline set by Kinder Morgan
Canada Ltd          for scrapping the pipeline's expansion
    The U.S. dollar        gained against a basket of major
currencies after Italy's president set the country on a path to
fresh elections, pressuring the euro       .             
    Canadian government bond prices were higher across a flatter
yield curve in sympathy with German Bunds. The 10-year
            rose 45 Canadian cents to yield 2.296 percent.
    The 10-year yield touched its lowest intraday since April 19
at 2.292 percent.

 (Reporting by Fergal Smith
Editing by James Dalgleish and Tom Brown)