CANADA FX DEBT - Canadian dollar strengthens, benchmark yield climbs

By Fergal Smith

TORONTO (Reuters) - The Canadian dollar strengthened against its U.S. counterpart on Wednesday as risk appetite rose and investors raised bets on another interest rate hike by the Bank of Canada, but the move was not enough for the currency to break out of its recent range.

The loonie was trading 0.3% higher at 1.3445 per U.S. dollar, or 74.38 U.S. cents, which was toward the middle of its range since the start of the month of roughly 1.33 to 1.36.

It strengthened despite gains for the greenback against a basket of major currencies.

"We're seeing the Canadian dollar follow risk markets higher and oil markets higher ... but broader picture we're really rangebound," said Michael Goshko, senior market analyst at Convera Canada ULC.

"Traders don't seem to be willing to make any significant commitment until the whole (U.S.) debt ceiling issue is settled."

"Optimism about a potential breakthrough in the deadlock in Washington over the nation's debt limit helped lift U.S. stock indexes and the price of oil, one of Canada's major exports. U.S. crude oil futures settled 2.8% higher at $72.83 a barrel.

The gain for the loonie came after data on Tuesday showed the annual rate of inflation increasing in April for the first time in 10 months.

That has led to money markets betting on another rate hike by the Bank of Canada this year, rather than a shift to rate cuts that had previously been expected.

"We are certainly seeing a lot of reason for the Bank of Canada to consider hiking further," Goshko said.

The Canadian 2-year yield touched its highest level since March 10 at 4.072% before dipping to 4.058%, up 8.7 basis points on the day. The gap between it and the equivalent U.S. rate was at 9.2 basis points, its narrowest since Sept. 16.

(Reporting by Fergal Smith; editing by Jonathan Oatis)