* Canadian dollar at C$1.2116, or 82.54 U.S. cents
* Loonie touches its strongest since May 2015 at C$1.2112
* Bond prices mixed across a flatter yield curve
* Canada's 5-year yield climbs above U.S. equivalent
TORONTO, Sept 7 (Reuters) - The Canadian dollar strengthened on Thursday to a new 2-year high against its U.S. counterpart as the market weighed prospects of additional Bank of Canada interest rate hikes and the greenback lost ground against a basket of major currencies.
At 5 p.m. EDT (2100 GMT), the Canadian dollar was
trading at C$1.2116 to the greenback, or 82.54 U.S. cents, up 0.9 percent. The loonie's weakest level of the session was C$1.2241, while it touched its strongest since May 2015 at C$1.2112. "It's on fire," said David Bradley, director of foreign exchange trading at Scotiabank. "There is some expectation that we are going to see further appreciation of the Canadian dollar and further interest rate (hikes) being priced in over the next six months." The Bank of Canada struck a more confident approach to economic growth on Wednesday with its second rate hike in three months, pushing to the front of the pack of major central banks including the U.S. Federal Reserve. Its policy rate sits at 1 percent.
The U.S. dollar fell broadly as the European Central
Bank indicated a decision on tapering stimulus is likely in October, while worries about the impact of hurricanes Irma and Harvey on the U.S. economy weighed on U.S. Treasury yields.
Gains for the loonie came even as U.S. oil prices settled 0.1 percent lower at $49.09 a barrel, after a bigger-than expected crude stock build. Oil is one of Canada's major exports. Canadian government bond prices were mixed across a flatter
yield curve, with the two-year down 4.5 Canadian cents to yield 1.475 percent and the 10-year rising
6 Canadian cents to yield 1.939 percent. The gap between the 2-year yield and its U.S. counterpart widened by 6.8 basis points to a spread of 20.1 basis points, its widest since January 2015, while the 5-year spread turned positive for the first time since October 2014. Canada's employment report for August is due on Friday.
(Reporting by Fergal Smith; Editing by Meredith Mazzilli and James Dalgleish)