(Adds strategist comment, updates prices to close)
* Canadian dollar settles at C$1.3307, or 75.15 U.S. cents
* Sharpest C$ gain vs US$ in a year
* Bond prices higher across the yield curve, spread narrows
By Alastair Sharp
TORONTO, March 15 (Reuters) - The Canadian dollar strengthened by the most in a year against its U.S. counterpart on Wednesday as oil prices rallied and the U.S. Federal Reserve raised interest rates but signaled a cautious tone toward further increases.
"The Canadian dollar got a double shot of good news, one from the Fed and another from the first drop in U.S. oil inventories of 2017," said Adam Button, a currency analyst at ForexLive in Montreal.
"Bets against the Canadian dollar were very crowded in the last week as oil began to crack, and it's a race to the exits," he added.
The Canadian dollar CAD=D4 settled at C$1.3307 to the greenback, or 75.15 U.S. cents, much stronger than Tuesday's close of C$1.3485, or 74.16 U.S. cents.
It was the loonie's sharpest one-day move since March 16, 2016, and pushed the currency to its strongest level in two weeks.
Oil prices climbed for the first time in more than a week on a surprise drawdown in U.S. crude inventories and data from the International Energy Agency suggesting that OPEC cuts could create a crude deficit in the first half of 2017. O/R
Oil is one of Canada's major exports.
The Fed raised interest rates for the second time in three months, spurred by steady economic growth, strong job gains and confidence that inflation is rising to the central bank's target, but it signaled a more gradual pace of monetary tightening this year than many in the market anticipated.
In domestic data, household debt as a share of income rose to a record in the fourth quarter, data from Statistics Canada showed in a report likely to underscore concerns that consumers are becoming overly indebted. government bond prices were higher across the yield curve, with the two-year CA2YT=RR up 9.5 Canadian cents to yield 0.804 percent and the 10-year CA10YT=RR rising 61 Canadian cents to yield 1.762 percent.
The two-year yield was 2.7 basis points closer to its U.S. equivalent, with the spread narrowing to -49.9 basis points. Earlier in March, it had touched its widest gap since January 2016 at -55.2 basis points.