CANADA FX DEBT-Canadian dollar hits a two-week high against downtrodden U.S. counterpart

By Fergal Smith

TORONTO, Sept 16 (Reuters) - The Canadian dollar strengthened to a two-week high against its U.S. counterpart on Tuesday, as broad-based declines for the greenback offset cooler-than-expected domestic inflation data.

The loonie CAD= was trading 0.2% higher at 1.3745 per U.S. dollar, or 72.75 U.S. cents, after touching its strongest intraday level since September 1 at 1.3738.

"While the currency has done better, it is more of a U.S. dollar weakness than a Canadian dollar strength story," said Benjamin Reitzes, Canadian rates & macro strategist at BMO Capital Markets.

The U.S. dollar .DXY fell against a basket of major currencies as investors grew more confident that the Federal Reserve would cut interest rates on Wednesday.

Adding to support for the loonie, the price of oil CLc1 was up 1.6% at $64.34 per barrel as markets weighed the possibility that Russian supplies may be disrupted by Ukrainian drone attacks on its ports and refineries. Oil is one of Canada's major exports.

The BoC is also expected to lower rates on Wednesday, as the global trade war takes its toll on the domestic economy. The central bank has been on hold since cutting its benchmark rate to 2.75% in March, the mid-point of its so-called neutral range.

Canada's annual inflation rate increased to 1.9% in August from 1.7% in July as gasoline prices on a yearly basis fell at a slower pace, but the inflation rate was below the 2% level that economists had forecast.

"All signs point to a (BoC) rate cut at tomorrow's meeting," Reitzes said. "The inflation data, while not great, didn't provide any red flags to keep them cutting at this meeting."

Canadian bond yields moved lower across the curve, with the 2-year CA2YT=RR down 3.7 basis points at 3.465%.