CANADA FX DEBT-C$ firms against weaker greenback as trade tensions rise

* Canadian dollar at C$1.2873, or 77.68 U.S. cents

* Oil prices fall 1.1 percent

* Bond prices lower across the yield curve

TORONTO, April 2 (Reuters) - The Canadian dollar strengthened against its U.S. counterpart on Monday as the greenback broadly fell and investors weighed the possible repercussions of an escalating trade dispute between the world's biggest economies.

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

currencies, paring some of last week's gains. China has increased tariffs by up to 25 percent on 128 U.S. products in response to U.S. duties on imports of aluminum and steel. A global trade war could hurt Canada's commodity-linked economy. The price of oil, one of Canada's major exports, fell even as investors weighed a drop in drilling activity in the United States and the potential for Washington to reintroduce sanctions against Iran.

U.S. crude prices were down 1.1 percent to $64.2 a

barrel. At 9:42 a.m. EST (1342 GMT), the Canadian dollar was trading 0.2 percent higher at C$1.2873 to the greenback, or 77.68 U.S. cents. The currency traded in a range of C$1.2864 to C$1.2910. Gains for the loonie came as data showed the pace of growth in the Canadian manufacturing sector firmed in March. The Markit Canada Manufacturing Purchasing Managers' index, a measure of manufacturing business conditions, increased to a seasonally adjusted 55.7 last month from 55.6 in February. Still, the loonie fell 2.4 percent against the greenback in the first quarter. Canadian government bond prices were lower across the yield curve in sympathy with U.S. Treasuries as investors turned attention to Friday's U.S. and Canadian jobs data.

The two-year fell 3 Canadian cents to yield 1.794 percent and the 10-year declined 27 Canadian cents

to yield 2.126 percent. On Thursday, the 10-year yield touched its lowest intraday since Jan. 4 at 2.073 percent.

(Reporting by Fergal Smith; Editing by David Gregorio)