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CANADA FX DEBT-C$ edges higher despite lower oil prices as greenback dips

(Adds analyst quotes and details on trading activity; updates prices)

* Canadian dollar at C$1.2274, or 81.43 U.S. cents

* Bond prices mixed across steeper yield curve

* Domestic manufacturing sales fall 2.6 percent in July

TORONTO, Sept 19 (Reuters) - The Canadian dollar edged higher on Tuesday against its U.S. counterpart, shrugging off soft domestic manufacturing data and lower oil prices as the greenback broadly fell ahead of a Federal Reserve interest rate decision on Wednesday.

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

trading at C$1.2274 to the greenback, or 81.47 U.S. cents, up 0.2 percent. The currency traded in a range of C$1.2255 to C$1.2309. The loonie was paring some losses from the day before, when a Bank of Canada policymaker said the currency's strength will be a factor in future rate decisions. It touched on Monday its weakest in nearly two weeks at C$1.2338. "We are really just treading water ahead of tomorrow's announcement by the Fed," said Michael Goshko, corporate risk manager at Western Union Business Solutions.

The U.S. dollar weakened against a basket of

currencies in advance of the Fed decision. Policymakers are expected to decide on the reduction of the central bank's $4.2 trillion worth of bond holdings. Canadian manufacturing sales dropped by 2.6 percent in July, the most in more than a year, as annual auto plant shutdowns cut sales of cars and motor vehicle parts. Prices of oil, one of Canada's major exports, retreated from near-five-month highs in advance of data expected to show a build in U.S. crude inventories as imports resume and refineries were still restarting after recent storm activity.

Canada posted a budget deficit of C$17.8 billion ($14.5 billion) for the 2016-17 fiscal year, the Finance Department said, below the preliminary deficit of C$21.85 billion reported in May. Canadian government bond prices were mixed across a steeper

yield curve, with the two-year up 2 Canadian cents to yield 1.557 percent and the 10-year down 10 Canadian

cents to yield 2.094 percent. Canada's August inflation report and retail sales data for July are due on Friday.

(Reporting by Fergal Smith; Editing by Bill Trott and Jonathan Oatis)