CANADA FX DEBT-C$ posts 2-year high vs weaker greenback as oil rallies

(Add analyst quotes and details throughout, updates prices)

* Canadian dollar at C$1.2383, or 80.76 U.S. cents

* Loonie touches its strongest since June 2015 at C$1.2336

* Bond prices mixed across flatter yield curve

* Canada-U.S. 2-year spread widens to 5.5 basis points

TORONTO, Sept 5 (Reuters) - The Canadian dollar strengthened to a two-year high against its U.S. counterpart on Tuesday as oil rallied and the greenback lost ground broadly, while investors weighed prospects of a Bank of Canada interest rate hike as early as this week. Prices of oil, one of Canada's major exports, climbed as the gradual restart of refineries in the Gulf of Mexico that were shut by Hurricane Harvey raised demand for crude.

U.S. crude prices settled 2.9 percent higher at

$48.66 a barrel.

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

currencies that included the safe-haven yen, pressured by North Korea's largest nuclear test and a Federal Reserve official's comments about low U.S. inflation. North Korea on Sunday conducted its sixth nuclear test, which it said was of an advanced hydrogen bomb for a long-range missile. "The U.S. dollar is generally weak," said Daniel Katzive, head of FX strategy North America. "Anticipation that the Bank of Canada could hike as soon tomorrow is providing some additional support (for the loonie)." On Wednesday, the Bank of Canada will likely announce it will leave rates unchanged, a Reuters poll released on Friday showed. The bank will probably wait until October to raise them, according to the survey. Still, the chances of a hike this week have climbed to nearly 40 percent, the overnight index swaps market indicated, from around 20 percent before data on Thursday showing Canada's economy expanded in the second quarter at its fastest pace in nearly six years. The central bank raised rates in July for the first time in nearly seven years. Its policy rate stands at 0.75 percent.

At 4 p.m. (2000 GMT), the Canadian dollar was

trading at C$1.2383 to the greenback, or 80.76 U.S. cents, up 0.3 percent. The currency's weakest level of the session was C$1.2416, while it touched its strongest since June 2015 at C$1.2336. Canadian government bond prices were mixed across a flatter yield curve as tensions over North Korea fed investor demand for safe-haven assets, including longer-dated government bonds.

The two-year price dipped 1.5 Canadian cents to yield 1.349 percent and the 10-year climbed 47

Canadian cents to yield 1.861 percent. The two-year yield climbed 5.5 basis points above its U.S. equivalent, the widest gap for the spread since May 2015. Canada's trade data for July is also due on Wednesday, while the August employment report is awaited on Friday.

(Reporting by Fergal Smith; Editing by W Simon and Peter Cooney)