CANADA FX DEBT-C$ weakens to near 2-week low as yield spreads widen

* Canadian dollar at C$1.2564, or 79.59 U.S. cents

* Loonie touches its weakest since July 21 at C$1.2589

* Bond prices slightly higher across the yield curve

TORONTO, Aug 2 (Reuters) - The Canadian dollar weakened on Wednesday to a nearly two-week low against its U.S. counterpart as the gap between U.S. and Canadian yields widened after having narrowed sharply in recent months. Canada's two-year yield fell 1.8 basis points further below its U.S. counterpart to a spread of -9.9 basis points. The spread last week hit its narrowest since May 2015 at -2.4 basis points, after the Bank of Canada raised interest rates earlier in July for the first time in nearly seven years. Losses for the loonie and other commodity-linked currencies, such as the Australian and New Zealand dollars, came as a senior administration official said U.S. President Donald Trump is close to a decision on how to respond to what he considers China's unfair trade practices. Commodity-linked currencies could be hurt by the threat of protectionist policies.

At 9:05 a.m. ET (1305 GMT), the Canadian dollar was

trading at C$1.2564 to the greenback, or 79.59 U.S. cents, down 0.2 percent. The currency's strongest level of the session was C$1.2533, while it touched its weakest since July 21 at C$1.2589. Still, the loonie has rallied nearly 10 percent since early May. It touched on Thursday its strongest in more than two years at C$1.2414. Oil, one of Canada's major exports, shook off bearish headlines as investors and traders took advantage of earlier losses and pushed crude prices back towards this week's eight-week highs.

U.S. crude prices were up 0.16 percent at $49.24 a

barrel. Canadian auto sales rose 4.9 percent in July as the industry benefited from strong economic growth even as U.S. sales fell for a fifth consecutive month, according to data released on Tuesday. Canadian government bond prices were slightly higher across

the yield curve, with the two-year up 0.5 Canadian cent to yield 1.260 percent and the 10-year rising 7

Canadian cents to yield 1.950 percent. Both Canadian and U.S. jobs data for July and domestic trade data for June are due on Friday.

(Reporting by Fergal Smith; Editing by Meredith Mazzilli)