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

* Canadian dollar at C$1.2280, or 81.43 U.S. cents

* Bond prices nudge higher across the yield curve

* Domestic manufacturing sales fall 2.6 percent in July

TORONTO, Sept 19 (Reuters) - The Canadian dollar strengthened slightly on Tuesday against its U.S. counterpart, shrugging off weaker-than-expected domestic manufacturing data as oil prices rose and the greenback broadly fell.

At 9:07 a.m. ET (1307 GMT), the Canadian dollar was

trading at C$1.2280 to the greenback, or 81.43 U.S. cents, up 0.1 percent. The currency traded in a range of C$1.2263 to C$1.2309. On Monday, the loonie touched its weakest in nearly two weeks at C$1.2338 after a Bank of Canada policymaker said the currency's strength will be a factor in future rate decisions.

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, Statistics Canada said.

Prices of oil, one of Canada's major exports, traded close to five-month highs after key Middle Eastern producers showed they continued to comply with output cuts under an OPEC-led deal that Iraq's oil minister said could be extended or deepened.

U.S. crude prices were up 0.78 percent at $50.30 a

barrel.

The U.S. dollar lost ground against a basket of major

currencies ahead of the start of the Federal Reserve's two-day policy meeting. The Fed is expected to announce the start of a plan to trim its $4.5-trillion portfolio of assets on Wednesday, with investors also looking for clues on whether U.S. interest rates could rise again by year-end. 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 edged higher across the

yield curve, with the two-year up 1.5 Canadian cents to yield 1.56 percent and the 10-year rising 3

Canadian cents to yield 2.078 percent. Canada's August inflation report and retail sales data for July are due on Friday.

(Reporting by Fergal Smith; Editing by Bill Trott)