* Canadian dollar at C$1.3161, or 75.98 U.S. cents
* Canadian factory sales rise 1.1 percent in June
* Bond prices higher across flatter yield curve
* 10-year yield touches a 3-week low at 2.246 percent
By Fergal Smith
TORONTO, Aug 16 (Reuters) - The Canadian dollar edged lower against its U.S. counterpart on Thursday as a planned oil pipeline from Alberta to Nebraska met with a setback, but the currency held within its recent range ahead of the country's inflation report due on Friday.
At 4 p.m. EDT (2000 GMT), the Canadian dollar CAD=D4 was trading 0.2 percent lower at C$1.3161 to the greenback, or 75.98 U.S. cents. The currency, which on Monday neared a three-week low of C$1.3179, traded in a range of C$1.3114 to C$1.3175.
"We are really just treading water ahead of tomorrow's inflation data," said Brad Schruder, director of corporate sales and structuring at BMO Capital Markets. "Experienced global investors have little interest in taking positions ahead of a major piece of data such as CPI."
The inflation data could help guide expectations for further Bank of Canada interest rate increases this year. Money markets expect the central bank to hike its benchmark interest rate, which sits at 1.50 percent, once more by December. BOCWATCH
A federal judge in Montana on Wednesday ordered the U.S. State Department to do a full environmental review of a revised route for a phase of the Keystone XL crude oil pipeline, which, when completed, would carry heavy crude to Steele City in Nebraska from Canada's oil sands in Alberta. pipeline could help reduce transport bottlenecks for Canadian oil, which trades at a discount to the price of U.S. crude.
Canadian factory sales grew by 1.1 percent in June from May, thanks largely to a rebound in petroleum and coal products after temporary shutdowns in the spring, Statistics Canada said. Trade Representative Robert Lighthizer expressed hope a breakthrough could be made in the coming days in efforts to rework the North American Free Trade Agreement, which includes Canada and Mexico. His Mexican counterpart said flexibility was needed to reach a deal. U.S. dollar weakened against a basket of other major currencies as news that a Chinese delegation will travel to the United States for trade talks prompted investors to buy back into currencies hit hard in a sell-off in recent days. crude oil futures CLc1 settled 0.7 percent higher at $65.46 a barrel. Oil is one of Canada's major exports.
Canadian government bond prices were higher across a flatter yield curve, with the 10-year CA10YT=RR rising 12 Canadian cents to yield 2.255 percent. The 10-year yield touched 2.246 percent, its lowest intraday since July 25.