* Canadian dollar at C$1.2524, or 79.85 U.S. cents
* Loonie touches weakest level since Jan. 17 at C$1.2533
* Oil prices fall nearly 2 percent
* Bond prices rally across the yield curve
TORONTO, Feb 5 (Reuters) - The Canadian dollar dropped to a nearly three-week low against its U.S. counterpart on Monday as a selloff in equity markets continued and oil prices fell, while investors weighed prospects for further Bank of Canada interest rate hikes.
At 4 p.m. EST (2100 GMT), the Canadian dollar was
trading 0.7 percent lower at C$1.2524 to the greenback, or 79.85 U.S. cents. The currency's strongest level of the session was C$1.2398, while it touched its weakest since Jan. 17 at C$1.2533. "A lot of good news is in the cake at this point for CAD," said Mazen Issa, senior FX strategist at TD Securities. "The market, we think, is too optimistic on the ability of the central bank to deliver more tightening." Bank of Canada Senior Deputy Governor Carolyn Wilkins will speak on Thursday, which could offer the next clues on the outlook for interest rates. The central bank hiked last month for the third time since July. Money markets expect two further rate increases this year.
The U.S. dollar rose against a basket of major
currencies as U.S. bond yields rallied on safe-haven demand stemming from a dramatic selloff on Wall Street, where the Dow Jones at one point fell more than 1,500 points. Commodity-linked currencies, such as the Canadian dollar, tend to underperform when stocks fall, because of the signal that it sends on prospects for global economic growth. The price of oil, one of Canada's major exports, fell as rising U.S. output and a weaker physical market added to the pressure from a widespread decline across equities and commodities.
U.S. crude oil futures settled nearly 2 percent lower
at $64.15 a barrel. Canada's trade data for December is due on Tuesday and the January employment report is due on Friday. The country is coming off its best year for job growth since 2002 and economists will look to see whether the job market remains strong enough to support further interest rate hikes. Canadian government bond prices were higher across the yield
curve, with the two-year up 12.5 Canadian cents to yield 1.789 percent and the 10-year rising 53
Canadian cents to yield 2.294 percent. The 10-year yield touched its highest intraday level since May 2014 at 2.393 percent. Canada will not proceed with next week's ultra-long bond auction and will not issue ultra-long bonds this quarter because criteria for issuance was not met, the Bank of Canada said.
(Reporting by Fergal Smith; Editing by Paul Simao and Grant McCool)