CANADA FX DEBT-C$ weakens as bank ratings downgrade offsets oil rally

 (Adds trader comment, updates prices)
    * Canadian dollar at C$1.3693, or 73.03 U.S. cents
    * Bond prices higher across the yield curve
    * Two-year spread versus Treasuries hits widest in 10 years

    By Morgan Sharp
    TORONTO, May 11 (Reuters) - The Canadian dollar weakened on
Thursday against its U.S. counterpart as a ratings downgrade for
the country's major banks weighed, offsetting higher oil prices.
    Moody's Investor Service downgraded the long-term ratings
for six Canadian banks late on Wednesday, pointing to rising
domestic consumer debt and the country's elevated housing prices
that leaves lenders more vulnerable to a slowdown in the
Canadian economy.             
    "That was the catalyst that started the Canadian dollar
selling off after yesterday's close," said David Bradley,
director of foreign exchange trading at Scotiabank.
    The currency touched a nearly one-week low of C$1.3770, or
72.62 U.S. cents, before paring losses in a move Bradley partly
ascribed to a move higher in U.S. equities.
    At 4 p.m. ET (2000 GMT), the Canadian dollar          was
trading at C$1.3693 to the greenback, or 73.03 U.S. cents, down
0.3 percent, according to Reuters data.
    Last Friday it hit its weakest in 14 months at C$1.3793.
    Speculators had already become bearish on the Canadian
dollar in the face of depressed oil prices and a more uncertain
trade outlook with the United States. The phenomenon of
investors selling Canadian assets on the expectation that the
country's economy will suffer if a housing bubble pops has been
called "The Great White Short."             
    U.S. crude        prices were up 1 percent at $47.80 a
barrel after a fall in U.S. inventories and a
bigger-than-expected cut in Saudi supplies to Asia helped
tighten the oil market. Oil is one of Canada's major exports.
    "Commodity prices are all subdued right now. Iron ore,
copper, gold, crude, everything has sold off over the last two
to four weeks, which has put pressure on the currency," Scotia's
Bradley said.
    Canadian government bond prices were higher across the yield
curve, with the two-year            up 2.5 Canadian cents to
yield 0.709 percent and the 10-year             rising 28
Canadian cents to yield 1.608 percent.
    The spread between the lower yield on 2-year Canadian bonds
versus their U.S. equivalent is near its widest since 2007.
    The market is expecting the Federal Reserve to raise U.S.
interest rates further next month but has largely given up on
prospects of a hike this year from the Bank of Canada.

 (Additional reporting by Fergal Smith; Editing by Bernard Orr
and James Dalgleish)