* Canadian dollar at C$1.2713, or 78.66 U.S. cents
* Loonie touches its weakest since Dec. 22 at C$1.2760
* Bond prices rise across the yield curve
* Canada-U.S. 2-year spread touches its widest since June 14
By Fergal Smith
TORONTO, Feb 22 (Reuters) - The Canadian dollar weakened to a two-month low against its U.S. counterpart on Thursday after a surprise drop in domestic retail sales supported expectations for the Bank of Canada to leave interest rates on hold next month.
At 4:00 p.m. EST (2100 GMT), the Canadian dollar CAD=D4 was trading 0.1 percent lower at C$1.2713 to the greenback, or 78.66 U.S. cents.
The currency's strongest level of the session was C$1.2670, while it touched its weakest since Dec. 22 at C$1.2760.
Canadian retail sales fell by 0.8 percent in December from November as a pullback at electronics stores offset higher purchases of new cars, Statistics Canada said. Analysts had forecast an increase of 0.2 percent. followed recent data showing manufacturing sales and wholesale trade also dropped in December.
"The numbers have been slightly softer but that has been consistent with the view that the BoC has had that things would slow down at the end of the second half of the year," said Alvise Marino, a foreign exchange strategist at Credit Suisse (SIX:CSGN) in New York.
The Bank of Canada expects growth to slow to a 2.2 percent pace in 2018 after a projected 3.0 percent in 2017.
The central bank raised interest rates in January for the third time since July. But money markets expect the benchmark rate to be left unchanged at 1.25 percent when the bank makes its next rate decision on March 7. BOCWATCH
"Risk assets have turned a lot more uncertain, and the Canadian dollar tends to be pretty strongly correlated to risk assets," Marino said.
The loonie has fallen 3.5 percent since stocks on Wall Street lurched lower earlier this month.
The price of oil, one of Canada's major exports, was boosted by data showing a surprise draw in U.S. crude inventories. U.S. crude CLc1 prices settled 1.8 percent higher at $62.77 a barrel. government bond prices were higher across the yield curve, with the two-year CA2YT=RR up 9.5 Canadian cents to yield 1.8 percent and the 10-year CA10YT=RR rising 42 Canadian cents to yield 2.301 percent.
The gap between Canada's 2-year yield and its U.S. equivalent widened by 3.2 basis points to a spread of -45.4 basis points, its widest since June 14.
Canada's inflation report for January is due on Friday.