CANADA FX DEBT-C$ rallies as BoC hikes rates despite NAFTA cloud

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* Canadian dollar at C$1.2387, or 80.73 U.S. cents Loonie touches its strongest since Jan. 5 at C$1.2362

* Bond prices mixed across the yield curve

* Canada-U.S. 2-year spread widens by 2.9 basis points

TORONTO, Jan 17 (Reuters) - The Canadian dollar strengthened to a 12-day high against the greenback on Wednesday after the Bank of Canada hiked interest rates and indicated confidence in the outlook for the economy, even as it sounded a cautious tone on the future of NAFTA. The central bank raised its benchmark interest rate by 25 basis points to 1.25 percent, as expected, after recent data showed strong job growth and firmer inflation. The loonie initially fell as the bank's worries about prospects for the North American Free Trade Agreement dented expectations for additional rate increases. Canada, which sends about 75 percent of its exports to the United States, is increasingly convinced U.S. President Donald Trump will soon announce that the United States intends to pull out of NAFTA. But the "balanced tone" of a press conference with Bank of Canada Governor Stephen Poloz and Senior Deputy Governor Carolyn Wilkins helped the currency recover, said Eric Theoret, currency strategist at Scotiabank. "They were really quick to highlight a lot of the positive and constructive developments that made them optimistic about the forecast and the outlook for the economy," Theoret said. The central bank raised its forecast for 2018 growth to 2.2 percent from 2.1 percent, while it also bumped up its forecast for 2019, after an estimated 3.0 percent expansion in 2017. At 2:46 p.m. EST (1946 GMT), the Canadian dollar was trading 0.4 percent higher at C$1.2387 to the greenback, or 80.73 U.S. cents. The currency's weakest level of the session was C$1.2540, while it touched its strongest since Jan. 5 at C$1.2362. The price of oil, one of Canada's major exports, rose ahead of the release of U.S. petroleum data that was expected to show a ninth straight weekly drawdown in crude inventories.

Canadian government bond prices were mixed across the yield

curve, with the two-year up 2 Canadian cents to yield 1.764 percent and the 10-year falling 15 Canadian

cents to yield 2.19 percent. The gap between the two-year yield and its U.S. counterpart widened by 2.9 basis points to a spread of -27.4 basis points, its widest since Dec. 15.

(Reporting by Fergal Smith; Editing by Frances Kerry and Tom Brown)