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CANADA FX DEBT-C$ rises with oil; finance minister shows comfort with currency strength

currency strength@

* Canadian dollar at C$1.2157, or 82.26 U.S. cents

* Bond prices lower across a steeper yield curve

* U.S. crude prices rise 0.87 percent

* Lending to Canadian small businesses climbs in July

TORONTO, Sept 13 (Reuters) - The Canadian dollar edged higher on Wednesday against its U.S. counterpart as oil prices rose and after Canada's finance minister indicated he could live with a more robust currency. Finance Minister Bill Morneau told Reuters in an interview late on Tuesday that the recent rise of the currency reflected the country's economic strengths. The Canadian dollar has rallied more than 13 percent against the U.S. greenback since early May and touched its strongest in more than two years on Friday. Prices of oil, one of Canada's major exports, rose after the International Energy Agency (IEA) said the global oil surplus was starting to shrink due to robust demand and an output drop from major producers.

U.S. crude prices were up 0.87 percent at $48.65 a

barrel.

At 9:17 a.m. ET (1317 GMT), the Canadian dollar was

trading at C$1.2157 to the greenback, or 82.26 U.S. cents, up 0.2 percent. The currency traded in a range of C$1.2131 to C$1.2186. Gains for the loonie came as data showed that lending to Canadian small businesses climbed to the highest level in 1-1/2 years in July, pointing to a pickup in corporate spending that could help underpin recent economic strength. Canada's economy has expanded at a rapid pace this year, prompting the Bank of Canada to raise interest rates in July and last week after sitting on the sidelines for nearly seven years.

The U.S. dollar firmed, with traders wary of taking

new positions on the currency ahead of inflation data due on Thursday that will be closely watched by the Federal Reserve as it considers when to next raise rates. Canadian government bond prices were lower across a steeper

yield curve, with the two-year down 0.5 Canadian cent to yield 1.55 percent and the 10-year falling 13

Canadian cents to yield 2.059 percent. The gap between the 10-year yield and its U.S. equivalent narrowed by 1.6 basis points to a spread of -11.2 basis points. It was as wide as -84.0 basis points near the end of May.

Canada's new housing price index for July is due on Thursday and August home sales data is awaited on Friday.

(Reporting by Fergal Smith; Editing by Meredith Mazzilli)