* Canadian dollar at C$1.2661, or 78.98 U.S. cents
* Canada's inflation rate pulls back to 1.7 percent
* Bond prices rise across flatter yield curve
* Canada-U.S. 2-year spread reaches widest since June 14
By Fergal Smith
TORONTO, Feb 23 (Reuters) - The Canadian dollar strengthened against its U.S. counterpart on Friday, buoyed by rising oil prices and data showing Canada's inflation has cooled less than economists had expected.
At 4 p.m. EST (2100 GMT), the Canadian dollar CAD=D4 was trading 0.3 percent higher at C$1.2661 to the greenback, or 78.98 U.S. cents.
The currency traded in a range of C$1.2614 to C$1.2726.
"Inflation was a little firmer than expected, especially the core, and that helped the Canadian dollar strengthen," said Win Thin, global head of emerging markets strategy at Brown Brothers Harriman.
The annual inflation rate pulled back to 1.7 percent in January, above economists' forecasts for 1.4 percent, while underlying inflation rose. today the Canadian dollar was under a little bit of pressure," Thin said. "Today's inflation data helped it gain a little bit more traction."
On Thursday, the loonie touched a two-month low at $1.2760. For the week, it fell 0.9 percent.
Still, the data may not have much impact on the Bank of Canada's interest rate outlook after inflation was boosted by a minimum wage hike in Ontario, Canada's most populous province.
"I would think the BoC looks through this minimum wage pass through effect as a transitory driver," said Derek Holt, head of capital markets economics at Scotiabank.
Chances of another rate hike in March stayed at less than 10 percent, data from the overnight index swaps market showed. BOCWATCH
The central bank lifted rates in January for the third time since July. Its benchmark rate sits at 1.25 percent.
Speculators cut bullish bets on the Canadian dollar for the second straight week, data from the U.S. Commodity Futures Trading Commission and Reuters calculations showed. As of Feb. 20, net long positions had fallen to 23,127 contracts from 32,529 a week earlier.
The price of oil, one of Canada's major exports, was boosted by the shutdown of the El Feel oilfield in Libya. U.S. crude oil futures CLc1 settled 1.2 percent higher at $63.55 a barrel. government bond prices were higher across a flatter yield curve in sympathy with U.S. Treasuries. The two-year CA2YT=RR rose 3.5 Canadian cents to yield 1.782 percent and the 10-year CA10YT=RR climbed 38 Canadian cents to yield 2.251 percent.
The gap between Canada's two-year yield and its U.S. equivalent widened by 1 basis point to a spread of -46.4 basis points, its widest since June 14.