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CANADA FX DEBT-C$ strengthens vs weaker greenback as core inflation rises

(Adds strategist quotes and updates prices)

* Canadian dollar at C$1.2327, or 81.12 U.S. cents

* Canada's inflation rate falls to 1.9 percent in December

* Bond prices mixed across yield curve

* Canada-U.S. 2-year spread widens by 4.1 basis points

TORONTO, Jan 26 (Reuters) - The Canadian dollar strengthened against its U.S. counterpart on Friday as the greenback broadly fell and domestic data showed a pick up in underlying inflation. Canada's annual inflation rate dipped as expected in December to 1.9 percent but two out of three of the Bank of Canada's measures of core inflation rose. Additional firming of core inflation "validates" the Bank of Canada's interest rate hike earlier this month, said Scott Smith, managing partner at Viewpoint Investment Partners. "The data continues to come out with a positive shine." The central bank has raised rates three times since July. Its benchmark interest rate sits at 1.25 percent, its highest since January 2009. Money markets expect another hike by May.

The U.S. dollar fell against a basket of major

currencies, bruised by comments by senior U.S. officials this week backing a weak dollar and after data showed U.S. economic growth unexpectedly slowed in the fourth quarter. The weaker greenback helped underpin the price of oil, one

of Canada's major exports. U.S. crude prices settled up

nearly 1.0 percent at $66.14 a barrel.

At 4 p.m. EST (2100 GMT), the Canadian dollar was

trading 0.4 percent higher at C$1.2327 to the greenback, or 81.12 U.S. cents. The currency traded in a range of C$1.2294 to C$1.2391. On Thursday, the loonie touched its strongest in four months at C$1.2283. For the week, the loonie rose 1.4 percent. Speculators raised bullish bets on the Canadian dollar for the third straight week, data from the U.S. Commodity Futures Trading Commission and Reuters calculations showed. As of Jan. 23, net long positions rose to 22,557 contracts from 17,556 a week earlier. Canadian government bond prices were mixed across the yield

curve, with the 10-year rising 1 Canadian cent to

yield 2.264 percent. The gap between Canada's 2-year yield and its U.S. counterpart widened by 4.1 basis points to a spread of -30.3 basis points, its widest since Dec. 12.

(Reporting by Fergal Smith; Editing by Chris Reese)