* Canadian dollar at C$1.2535, or 79.78 U.S. cents
* Loonie touches its weakest since Oct. 10 at C$1.2545
* Bond prices higher across the yield curve
* Canada-U.S. 2-year spread narrows by 4.3 basis points
TORONTO, Oct 16 (Reuters) - The Canadian dollar weakened to a nearly one-week low against its U.S. counterpart on Monday ahead of the release of a key business survey, while investors weighed doubts about a deal being reached to renew NAFTA. Negotiators at talks to modernize the North American Free Trade Agreement are running out of time and look set to extend the remaining rounds in a bid to meet an end-year deadline as tensions rise, three sources familiar with the matter said on Sunday. Canada sends about 75 percent of its exports to the United States and its economy could suffer if the agreement is not renewed. The Bank of Canada, which raised interest rates in July and September, will release its business outlook report at 10:30 a.m. ET (1430 GMT). A pick-up in business spending intentions could raise the possibility the central bank will hike rates for a third time before the year is out.
At 9:19 a.m. ET (1319 GMT), the Canadian dollar was
trading at C$1.2535 to the greenback, or 79.78 U.S. cents, down 0.6 percent. The currency's strongest level of the session was C$1.2471, while it touched its weakest since Oct. 10 at C$1.2545. The loonie lost ground even as prices of oil, one of Canada's major exports, climbed.
U.S. crude prices were up 1.52 percent at $52.23 a
barrel as fighting escalated in Iraq's oil-rich city of Kirkuk.
Canadian growth will slow down in the second half of 2017 as the economy starts to approach full capacity in the wake of a prolonged oil shock, Bank of Canada Governor Stephen Poloz said on Saturday. Still, data on Monday showing a rise in lending to Canadian small businesses in August, suggesting that corporate spending could help sustain broader economic growth down the line.
Speculators have raised bullish bets on the loonie to the highest since November 2012, data from the U.S. Commodity Futures Trading Commission and Reuters calculations showed on Friday. As of Oct. 10, Canadian dollar net long positions had edged up to 76,392 contracts from 75,128 a week earlier. Canadian government bond prices were higher across the yield
curve, with the two-year up 5.5 Canadian cents to yield 1.514 percent and the 10-year rising 17
Canadian cents to yield 2.019 percent. The gap between the 2-year yield and its U.S. counterpart narrowed by 4.3 basis points to a spread just above parity.
(Reporting by Fergal Smith; Editing by Bernadette Baum)