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CANADA FX DEBT-C$ weakens as U.S.-North Korea tension weighs on risk appetite

* Canadian dollar at C$1.2693, or 78.78 U.S. cents

* Bond prices higher across a flatter yield curve

TORONTO, Aug 9 (Reuters) - The Canadian dollar weakened against on Wednesday its U.S. counterpart as worries about increased U.S.-North Korea tension weighed, offsetting higher oil prices and stronger-than-expected domestic housing data. President Donald Trump's warning that North Korea faced "fire and fury," and Pyongyang's threat of possible retaliation, drove investors out of stocks and into the yen, Swiss franc, gold and government debt. Commodity-linked currencies, such as the Canadian dollar, which are sensitive to global trade, also lost ground.

At 9:08 a.m. ET (1308 GMT), the Canadian dollar was

trading at C$1.2693 to the greenback, or 78.78 U.S. cents, down 0.2 percent. The currency traded in a range of C$1.2666 to C$1.2708. It touched on Monday its weakest in three weeks at C$1.2715. Canadian housing starts rose in July to a seasonally-adjusted annual rate of 222,324 from June's upwardly revised 212,948, data from the Canada Mortgage and Housing Corporation showed. Economists had expected a 205,000 annual rate. The value of Canadian building permits unexpectedly rose in June, up 2.5 percent, on increased plans for commercial buildings, separate data from Statistics Canada showed.

U.S. crude prices were up 0.92 percent at $49.62 a

barrel ahead of a U.S. inventory report, which is expected to show crude stocks dropped for a sixth week. Oil is one of Canada's major exports. A U.S. proposal for Mexico and Canada to vastly raise the value of online purchases that can be imported duty-free from

stores like Amazon.com and eBay is emerging as

a flashpoint in an upcoming renegotiation of the NAFTA trade deal. Canadian government bond prices were higher across a flatter yield curve in sympathy with U.S. Treasuries as investors bought

safe-haven assets. The two-year rose 5 Canadian cents to yield 1.231 percent and the 10-year climbed 46

Canadian cents to yield 1.881 percent. The gap between the 2-year yield and the 10-year yield narrowed by 2.8 basis points to a spread of 65 basis points, its narrowest since July 24, as longer-dated bonds outperformed.

(Reporting by Fergal Smith; Editing by Nick Zieminski)