CANADA FX DEBT-C$ firms as oil prices rise, yield spreads narrow vs U.S.

* Canadian dollar at C$1.2715, or 78.65 U.S. cents

* Bond prices higher across the yield curve

* Canada-U.S. 2-year spread hits narrowest since Aug. 18

TORONTO, July 14 (Reuters) - The Canadian dollar edged higher on Friday against its U.S. counterpart as oil prices rose, while the gap between Canadian and U.S. bond yields narrowed after weaker-than-expected U.S. data. The gap between Canada's 2-year yield and its U.S. equivalent narrowed by 1.2 basis points to a spread of -14.4 basis points, its narrowest since Aug. 18. The narrower spread comes after the Bank of Canada raised interest rates on Wednesday for the first time in seven years. The central bank will follow up with another increase in October as it charts a course of gradual policy tightening, with two more hikes expected next year, according to a Reuters poll of primary dealers. Prices of oil, one of Canada's major exports, climbed and were on track for solid weekly gains following positive demand signals, production issues in Nigeria and a reported decline in inventory.

U.S. crude prices were up 0.43 percent to $46.28 a


At 9:10 a.m. ET (1310 GMT), the Canadian dollar was

trading at C$1.2715 to the greenback, or 78.65 U.S. cents, up 0.1 percent. The currency traded in a range of C$1.2693 to C$1.2747. It touched on Wednesday its strongest in nearly 13 months at C$1.2681.

The U.S. dollar fell against a basket of major

currencies after data showed U.S. inflation in June was unchanged from the previous month and retail sales unexpectedly weakened, fueling doubts about an interest rate increase later this year. Canadian government bond prices were higher across the yield curve in sympathy with U.S. Treasuries. The two-year rose 5 Canadian cents to yield 1.183 percent and the 10-year climbed 40 Canadian cents to yield 1.863 percent. On Thursday, the 2-year yield touched its highest since September 2013 at 1.257 percent.

(Reporting by Fergal Smith; Editing by Bernadette Baum)