(Adds strategist quotes and details on BoC interest rate
decision, updates prices)
* Canadian dollar at C$1.2876, or 77.66 U.S. cents
* Bank of Canada leaves policy interest rate at 1.25 percent
* U.S. oil prices rise 1.6 percent
* Bond prices lower across the yield curve
By Fergal Smith
TORONTO, May 30 (Reuters) - The Canadian dollar strengthened
against its U.S. counterpart by the most in more than two months
on Wednesday after the Bank of Canada left interest rates on
hold but boosted expectations for a hike at its next policy
meeting in July.
The central bank left its benchmark interest rate at 1.25
percent, as expected, but dropped cautious language about future
rate moves in a signal that higher borrowing costs are on the
way.
"We are pretty comfortable calling for a July hike," said
Andrew Kelvin, senior rates strategist at TD Securities. "This
reads a little bit more upbeat than previous communiques have."
The Bank of Canada has hiked three times since last summer.
Chances of further tightening in July jumped to around 70
percent from less than 50 percent before the announcement, the
overnight index swaps market indicated.
At 10:58 a.m. EDT (2000 GMT), the Canadian dollar
was trading 1.1 percent higher at C$1.2876 to the greenback, or
77.66 U.S. cents, its biggest gain since March 21.
The currency, which on Tuesday touched a more than two-month
low at C$1.3047, notched its strongest since May 24 at C$1.2853.
The price of oil, one of Canada's major exports, was
supported by tight supplies despite expectations OPEC and its
allies will pump more in the second half of 2018.
U.S. crude prices were up 1.6 percent at $67.80 a
barrel.
The U.S. dollar fell against a basket of major
currencies after reports that Italy's biggest party would make a
renewed attempt to form a coalition government and end months of
political turmoil helped the euro recover some recent lost
ground.
Canada's current account deficit widened to C$19.50 billion
in the first quarter, the third largest ever, thanks to a
growing international trade gap in goods, Statistics Canada
said.
In separate data, Canadian producer prices rose by 0.5
percent in April from March, the fourth consecutive increase, on
higher prices for energy and petroleum products.
Canadian government bond prices were lower across the yield
curve in sympathy with U.S. Treasuries. The 10-year
declined 55 Canadian cents to yield 2.253 percent.
On Tuesday, the 10-year yield touched its lowest since April
11 at 2.165 percent.
(Reporting by Fergal Smith
Editing by Bill Trott and Tom Brown)