CANADA FX DEBT-C$ adds to 2-month high, climbs more than 7 pct in 2017

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* Canadian dollar at C$1.2542, or 79.73 U.S. cents

* Loonie touches its strongest since Oct. 20 at C$1.2515

* 2017 gain for the currency is biggest in eight years

* Bond prices mixed across the yield curve

TORONTO, Dec 29 (Reuters) - The Canadian dollar strengthened to a two-month high against its U.S. counterpart on Friday, as the greenback broadly fell and oil prices rose, with the loonie on track to post its biggest yearly advance since 2009.

At 1:36 p.m. ET (1836 GMT), the Canadian dollar was

trading at C$1.2542 to the greenback, or 79.73 U.S. cents, up 0.2 percent. The currency broke out on Thursday from a range roughly between 1.26 and 1.29 over the past two months. On Friday, it touched its strongest since Oct. 20 at C$1.2515. "The U.S. dollar has been down for several sessions now and combined with oil prices at $60 ... it has definitely pushed USD-CAD down to levels that are on the low end of where we think we'll see it go," said Don Mikolich, executive director, foreign exchange sales at CIBC Capital Markets. The loonie has climbed 7.3 percent in 2017, its second straight year of gains as Canada's economy recovered following a plunge in oil prices.

U.S. oil prices have rebounded to reach their highest

since mid-2015. They were up 0.8 percent at $60.33 a barrel on Friday as an unexpected fall in American output and a decline in commercial crude inventories stoked buying.

The U.S. dollar slipped to its lowest in more than

three months against a basket of major currencies. Domestic data before the Christmas break, which showed an acceleration in inflation and strength in wholesale trade and retail sales, has helped underpin the loonie by increasing prospects of further interest rate hikes from the Bank of Canada. Money markets expect Canada's central bank to raise rates three times in 2018, which is more than is expected from the U.S. Federal Reserve. "If it wasn't for NAFTA and some other shadows ... one could become a little bit more bullish on the Canadian dollar," Mikolich said. U.S. President Donald Trump has threatened to withdraw from the North American Free Trade Agreement with Canada and Mexico if he cannot rework it in favor of the United States. Officials from the three countries will meet in Montreal Jan. 23-28 for talks on thorny subjects such as autos, dispute settlement and an expiry clause. Canadian government bond prices were mixed across the yield

curve, with the two-year up 2 Canadian cents to yield 1.685 percent and the 10-year falling 9 Canadian

cents to yield 2.042 percent.

(Reporting by Fergal Smith Editing by Chizu Nomiyama)