CANADA FX DEBT-C$ rallies as hotter inflation boosts rate hike chances

(Adds strategist quotes and details throughout on market activity; updates prices)

* Canadian dollar at C$1.2873, or 77.63 U.S. cents

* Loonie touches its strongest since March 12 at C$1.2824

* Oil rises 2.5 percent

* Bond prices lower across a flatter yield curve

TORONTO, March 23 (Reuters) - The Canadian dollar strengthened to an 11-day high against the greenback on Friday as oil prices rose and hotter-than-expected domestic inflation data raised prospects of a further Bank of Canada interest rate hike as soon as next month. The annual inflation rate rose to 2.2 percent, a three-year high, from 1.7 percent in January. Economists had forecast a rate of 2.0 percent. The Bank of Canada's three measures of core inflation also all strengthened. "Clearly we had a big bid for the Canadian dollar on the back of that CPI print," said Christian Lawrence, senior market strategist at Rabobank. "The move in CAD is about more (chance) of a hike being priced in for the April meeting." The Bank of Canada has raised rates three times since July even as it worried about a more uncertain trade outlook. Chances of a hike in April rose to more than 40 percent from 35 percent on Thursday, the overnight index swaps market indicated.

Still, separate data showing a weaker-than-expected 0.3 percent rise in January retail sales added to the picture of a domestic economy that has lost some momentum in recent months.

The price of oil, one of Canada's major exports, rose on prospects of extended supply cuts by major producers. U.S. crude

oil futures settled 2.5 percent higher at $65.88 a

barrel. Speculators raised bullish bets on the Canadian dollar for the first time in six weeks, data from the U.S. Commodity Futures Trading Commission and Reuters calculations showed. As of March 20, net long positions had increased to 24,560 contracts from 19,420 a week earlier.

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

trading 0.5 percent higher at C$1.2873 to the greenback, or 77.63 U.S. cents. The currency touched its strongest since March 12 at C$1.2824.

The U.S. dollar hovered near a one-month low against

a basket of major currencies as investors worried about escalating trade tensions between the United States and China.

Canada's commodity-linked economy could be hurt if global trade slowed. But the loonie has benefited this week from optimism about a deal to revamp the North American Free Trade Agreement. For the week, the loonie rose 1.8 percent, its biggest gain since September. Canadian government bond prices were lower across a flatter

yield curve, with the two-year down 6 Canadian cents to yield 1.857 percent and the 10-year falling 14

Canadian cents to yield 2.196 percent.

(Additional reporting by Susan Taylor Editing by Nick Zieminski and Sandra Maler)