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CANADA FX DEBT-Loonie falls as investors weigh risk of surprise rate cut

By Fergal Smith

(Adds strategist quotes, details throughout; updates prices) * Canadian dollar falls 0.3% against the greenback * Price of U.S. oil increases 2.4% * Loonie touches its strongest intraday since Aug. 14 at 1.3225 * Canada's curve inverts by the most since May 1999 By Fergal Smith TORONTO, Aug 27 (Reuters) - The Canadian dollar weakened against its U.S. counterpart on Tuesday, with the currency pulling back from a near two-week high earlier in the session as investors weighed the prospect of an unexpected interest rate cut next week by the Bank of Canada. At 4:27 p.m. (2027 GMT), the Canadian dollar was trading 0.3% lower at 1.3296 to the greenback, or 75.21 U.S. cents. The currency touched its strongest intraday level since Aug. 14 at 1.3225. "There is a lot of chatter about Canadian dollar selling flows," said Adam Button, chief currency analyst at ForexLive. "The Bank of Canada is one week away now and that has traders thinking about the possibility for a surprise rate cut." Chances of an interest rate cut at the central bank's Sept. 4 policy announcement have climbed to 25% from less than 10% at the beginning of the month. "There is a strong focus (from the Bank of Canada) on trade risk and it has obviously gone in the wrong direction," Button said. The bank highlighted last month the risks trade wars pose to the global economy as it left its benchmark interest rate on hold at 1.75%. At the end of July, the Federal Reserve eased interest rates for the first time since 2008. The loonie weakened on Tuesday even as the price of oil, one of Canada's major exports, gained ground. U.S. crude oil futures settled 2.4% higher at $54.93 a barrel. Canadian government bond prices were higher across a flatter yield curve in sympathy with U.S. Treasuries. The two-year rose 10.5 Canadian cents to yield 1.341% and the 10-year was up 87 Canadian cents to yield 1.125%. Canada's 10-year yield fell 21.6 basis points below the 2-year yield, which was the curve's biggest inversion since May 1999. (Reporting by Fergal Smith; EDiting by Steve Orlofsky and Sandra Maler)