CANADA FX DEBT-C$ has biggest gain in two months as July rate hike bets jump

 (Adds strategist quotes, details on activity; updates prices)
    * Canadian dollar at C$1.2876, or 77.66 U.S. cents
    * Bank of Canada leaves policy interest rate at 1.25 percent
    * U.S. oil prices rise 2.2 percent
    * Bond prices lower across yield curve

    By Fergal Smith
    TORONTO, May 30 (Reuters) - The Canadian dollar strengthened
against its U.S. counterpart by the most in more than two months
on Wednesday after the Bank of Canada left interest rates on
hold but boosted expectations for a hike at its next policy
meeting in July.    
    The central bank left its benchmark interest rate at 1.25
percent, as expected, but dropped cautious language about future
rate moves in a signal that higher borrowing costs are on the
    "The currency strengthened on the less cautious message from
the Bank of Canada, which has firmed up expectations for a July
rate hike," said Daniel Katzive, head of FX strategy North
America at BNP Paribas.
    The Bank of Canada has hiked three times since last summer.
Chances of further tightening in July jumped to 64 percent from
less than 50 percent before the announcement, the overnight
index swaps market indicated.           
    "We think that continued tightening from the Bank of Canada
effectively reinforces the range in USD-CAD, which we expect to
be centered around 1.28," Katzive said.
    At 4 p.m. EDT (2000 GMT), the Canadian dollar          was
trading 1.1 percent higher at C$1.2876 to the greenback, or
77.66 U.S. cents, its biggest gain since March 21.
    The currency, which on Tuesday touched a more than two-month
low at C$1.3047, notched its strongest since May 24 at C$1.2837.
    The price of oil, one of Canada's major exports, rebounded
from a four-day slump as Russia's central bank expressed caution
on plans to boost oil supply.             
    U.S. crude oil futures        settled 2.2 percent higher at
$68.21 a barrel.
    The U.S. dollar        fell against a basket of major
currencies after reports that Italy's biggest party would make a
renewed attempt to form a coalition government and end months of
political turmoil helped the euro recover some recent lost
    Canada's current account deficit widened to C$19.50 billion
in the first quarter, the third largest ever, thanks to a
growing international trade gap in goods, Statistics Canada
    Canada will "respond appropriately" to any U.S. steel and
aluminum tariffs, Foreign Minister Chrystia Freeland said, less
than two days before the punitive measures are due to kick in.
    Canadian government bond prices were lower across the yield
curve in sympathy with U.S. Treasury debt. The 10-year
            declined 55 Canadian cents to yield 2.253 percent.
    On Tuesday, the 10-year yield touched its lowest since April
11 at 2.165 percent.

 (Reporting by Fergal Smith)