* Canadian dollar at C$1.2855, or 77.79 U.S. cents
* Loonie touches its weakest since July 12 at C$1.2858
* Bond prices rise across a flatter yield curve
* Canadian yields fall further below U.S. Treasury yields
TORONTO, Oct 26 (Reuters) - The Canadian dollar weakened to a 3-month low against its broadly firmer U.S. counterpart on Thursday, with the loonie adding to its losses from the day before when the Bank of Canada cooled expectations for another interest rate hike this year. The Bank of Canada said on Wednesday it would be cautious as it considers its next move, watching how the economy adjusts to higher interest rates, tighter mortgage rules and uncertainty about U.S. trade policy. "The central bank has suddenly found itself stuck in neutral and traders are selling the currency," said Karl Schamotta, director of global markets strategy at Cambridge Global Payments. Perceived chances of another hike by the end of the year have fallen to 26 percent from 37 percent before the rate decision, the overnight index swaps market showed.
The U.S. dollar climbed against a basket of major
currencies after the European Central Bank extended its bond purchases well into 2018, pressuring the euro.
At 4 p.m. (2000 GMT), the Canadian dollar was
trading at C$1.2855 to the greenback, or 77.79 U.S. cents, down 0.5 percent. The currency earlier touched its weakest level since July 12 at C$1.2858. The loonie lost ground despite a 6-month high for U.S. crude
oil prices. U.S. crude futures settled up 0.9 percent at
$52.64 a barrel after Saudi Arabia said it was committed to ending a global supply glut. Oil is one of Canada's major exports. Canadian average weekly earnings of non-farm payroll employees rose 0.9 percent in August from July, data from Statistics Canada showed. Compared with August 2016, earnings climbed 1.7 percent. Canadian government bond prices were higher across a flatter
yield curve, with the 2-year up 2 Canadian cents to yield 1.459 percent and the 10-year rising 12
Canadian cents to yield 2.035 percent. The gap between the 2-year yield and its U.S. equivalent widened 2.2 basis points to a spread of -16 basis points.
(Reporting by Fergal Smith; Editing by Meredith Mazzilli and Peter Cooney)