* 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. 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. BOCWATCH
At 10:58 a.m. EDT (2000 GMT), the Canadian dollar CAD=D4 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. crude CLc1 prices were up 1.6 percent at $67.80 a barrel.
The U.S. dollar .DXY 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. 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. 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 CA10YT=RR 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.